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Record highs tempered by dismal jobs data

5 August 2021

US stock futures are modestly in the red following a record all-time close on the S&P500 last night. This latest bout of buying strength was propelled by a shift in the leadership of sectors. Lately, we have seen outperformance led by the more defensive areas of the markets, like healthcare, in place of the more interest rate sensitive parts of the market.

Big ADP Employment miss

While not a great predictor of the non-farm payrolls headline number released on Friday, the ADP employment data is always checked for any early hints about the job market. The employment index in the ISM non-manufacturing index will also be worth watching for clues on labour shortages.

Well, the ADP caused quite a shock printing a miserly addition of 330k jobs in July which was less than half the expected rise. Although this is the seventh straight month of “solid” employment gains, it is well below the consensus forecast for Friday’s payrolls print and the weakest addition since February. Bottlenecks continue to hold back stronger gains, particularly in light of new Covid-19 concerns tied to viral variants.

Markets react abruptly

All major US stock indices have dropped into the red while bond yields have plunged to the recent spike lows from July and are testing the 1.12% handle. The dollar has also fallen but remains in a tight range with last week’s low at 91.78 in the DXY on the radar.

Perhaps we need to wait for the main job market report at the end of the week. But the sharp reaction to the forerunner to the main event does ask a few questions. Is today’s weakness enough to delay the taper by the Federal Reserve? This could spark another round of buying in stocks as the stimulus punchbowl lingers for longer. Or is it the straw that breaks the back of the recovery story?

Gold touching recent highs

One asset enjoying the angst is gold which is up over 1% on the day. The 200-day moving average has capped prices so far over the last few weeks with prices struggling to break decisively above $1830. Gold bugs have pushed the precious metal to this resistance level again today with bullish momentum picking up. A strong close could finally clear the way for more upside, though the NFP report looms large.



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