Markets this week echoed the sentiment that "bad news might be good news". With a series of underwhelming data releases, there's growing belief among investors that the Federal Reserve's interest rate hike spree might have reached its zenith. These sentiments come in light of evidence pointing to a slowdown in US hiring and a gradual release from inflationary clutches. Consequently, Treasury yields have retracted considerably, creating favorable conditions for Wall Street's recovery.
The Anticipation Surrounding August’s NFP Report
The recent release of core PCE price index data showed a rise to 4.2% y/y in July. However, the discernible dip in its month-on-month trajectory hints at a possible descent in September. While the dollar and stocks meandered, awaiting definitive direction from August’s payrolls, Asian markets shined bright after China ramped up its economic bolstering measures. This said, the Australian dollar couldn't quite catch the upward momentum. Meanwhile, oil maintained its upward trajectory in light of a tightening market, and gold remained steady near its peak.
Yet, investors haven't wholly dismissed the idea of the Fed taking a break. With a 48% probability assigned to a 25-basis-point rate hike by November, the consensus isn't universal. This discrepancy signals not just diverse opinions on the Fed's future actions, but also warns of potential market turbulence if upcoming job reports outshine expectations.
The dominant speculation expects an addition of 170k nonfarm payrolls in August, marking a dip from July's 187k. However, the season's industrial actions, including the prominent Hollywood actors' strike, may result in figures even lower than anticipated. But these potentially modest job numbers might have a silver lining. Given the strike-induced lucrative pay settlements, we could witness a surge in wage growth in subsequent months. Plus, with the labor market stretched thin, unless there's a spike in job losses, consumer confidence should stay unscathed. This sentiment is reinforced by the 0.8% m/m hike in personal spending in July, feeding anticipations of a robust Q3 GDP growth.
Wall Street and Forex Markets Tread Carefully Pre-NFP
Despite the promising signs, Wall Street appeared reticent, with only the tech-centric Nasdaq securing gains by the day's end. Conversely, the US dollar saw a significant upturn, chiefly due to the euro’s fall post the release of its inflation data that spurred stagflation concerns within the Eurozone. The market's palpable suspense is undeniably centered around the payroll data, but the ISM manufacturing PMI for August and remarks from Boston Fed's Collins are equally anticipated.
This collective caution was mirrored in the Japanese yen's performance. Despite not receiving any strong hints of an imminent foreign exchange intervention from Japan's Finance Minister, Shunichi Suzuki, the currency remained notably robust.
Mixed Vibes from the Asia-Pacific
While major currencies demonstrated stability on Friday, the Australian dollar emerged as an exception, showing signs of fatigue despite its weekly gains. Investor sentiments seem to be pegging the Reserve Bank of Australia's (RBA) stance as non-aggressive, even amidst positive economic murmurs from China.
China's recent moves, including rate cuts by several banks and optimistic data from the Caixin manufacturing PMI, suggest a potential economic revival on the horizon. This optimism reflected in a surge in regional stocks and metal prices, although the Australian dollar remained unresponsive.
Energy and Precious Metals: A Promising Trajectory
Oil futures are gearing up to revisit their August zeniths. Anticipations are rife about Russia announcing supply curbs next week, especially against the backdrop of the existing high demand in the oil market. Gold, riding on its two-week rally bolstered by the U-turn in bond yields, aims for the coveted $1,950/oz mark, after nearly missing it by a whisker at $1,949/oz during the week.
