Daily Points

ON DECK FOR FRIDAY, AUGUST 2

KEY POINTS:

• Risk appetite enters Friday on its back foot
• What’s driving markets? It’s complicated!
• Nonfarm payrolls preview

Nonfarm payrolls (preview below) could make or break risk sentiment that is wrong footed so far this morning.

A combination of factors is driving equities lower with snps down by 1%, Nasdaq futures down by a little more, European cash markets lower by about ½% to about 1½% and following a weak Asian overnight session led by about a 6% drop in Japanese equities. The yen keeps charging higher as it is now below 149 to the buck. You won’t be surprised to hear that sovereign bonds are rallying, but not by that much with US Treasury yields down by 3–4bps alongside single digit basis point declines across EGB yields. Oil is up a few dimes again as energy markets watch and wait to see how Iran and its proxies may escalate the conflict in the Middle East.

WHAT’S CAUSING MARKET MOVES?

What’s driving negative sentiment in equities and lower bond yields? It’s complicated.

It’s August. Chill.

For one thing, always be careful toward month-end effects into thinning August volumes and liquidity. As PMs and other market professionals enter peak summer vacation periods in N.A. and Europe, they may well be playing it safer on their positions. You’d think we would all know better by now than to overreact to volatility around this time of year.

Exaggerated Tech Optimism Being Reined In

Mostly negative earnings from big US tech firms in yesterday’s after-market are also clearly driving some of the negative sentiment perhaps having more to do with how exaggerated the tech craze and AI sentiment had become. The market is also differentiating between winners and losers in tech, and may also be behaving in short-sighted fashion by looking only at the bottom line and ignoring investment surges that drove some of it and that could pay off handsomely over time.

Even on a personal level, do I really want to pay double for an AI laptop compared to a very good regular one when at present—and for probably quite a while yet—the benefits are either miniscule in a practical sense or downright absent? Do I really want to pay $2k+ for a new iphone when as near as I can tell the benefits are extraordinarily marginal?

Cherry-Picking US Macro Data

Fear of US payrolls may be behind some of the sentiment in the broader context of what’s happening with the US economy. On that note, there is cherry-picking of US data.

ISM-manufacturing reflects a small 10% direct share of US GDP and yet its decline sparked concern toward the health of the US economy while ignoring that its sentiment-based production gauge is misaligned with actual hard data on manufacturing output in the Federal Reserve’s figures for industrial production. We’ll see about next week’s ISM-services that is expected to rebound and that reflects a much bigger share of the modern US economy than manufacturing.

Markets ignored the lift to US productivity and soft unit labour costs yesterday despite their contribution toward a disinflationary backdrop for constructive Fed easing. They also ignored the solid gain in US vehicle sales despite being smaller than industry guidance.

They are also ignoring solid—but highly tentative—nowcasts for Q3 US GDP on the heels of 2.8% q/q SAAR Q2 GDP growth. This is not an economy tracking a recession versus a soft landing. Markets have assumed a recession lies right around the corner and economists have under-predicted growth in the US economy for ages now and been wrong in serial fashion while spending each quarter chasing the numbers higher over and over again (chart 1).

The US Treasury Curve in Finally Waking Up to Fed Easing

And on rates, the US curve is coming back into alignment toward something more reasonable but with still some way to go in narrowing spreads over other global benchmarks. I’ve long argued that the US front-end is too cheap unless neutral rate estimates are off by massive amounts. The Treasury curve should be rallying as Fed easing comes into clearer sight. The first round spillover effects are putting downward pressure on yields elsewhere such as Canada, but it’s debatable whether this will persist as the Canada curve is getting very richly priced in 5s.

The BoJ’s Questionable Moves

The BoJ’s tightening combined with the Fed providing clear signals that it is moving toward easing are disrupting the carry trade for now, but I’m still not convinced that the BoJ knows what it’s doing and it has a history of zigging when others are zagging. For now, the effects on the yen (chart 2) are hitting the Nikkei hard given its 15$ drop from the all-time high on July 10th that corresponded to the peak weakness in the yen when it was pushing toward 162. The Nikkei is taking out this overshooting of risk appetite that should have never happened in the first place as it was predicated upon the assumption that the yen’s fall would persist and build further.

Geopolitical Effects

We also clearly cannot dismiss geopolitical risk as markets watch rising tensions in the Middle East, and yet far more often than not this is not usually a durable weight against risk appetite.

US Election Volatility

There could also be a repricing of US election effects, assuming markets have the foggiest idea of how to do that. That’s likely to continue for quite a while.

NONFARM PAYROLLS PREVIEW

The breakeven rate for payrolls is just north of 200k in order to keep pace with the pick-up in population growth, although that’s subject to the extent to which all of the population surge is assumed to be equally employable and counted in the numbers. Consensus expects a number that on the surface looks a touch softer than that for payrolls, but that falls well within the statistical noise bands. All estimates within consensus are within such confidence interval bands despite the hubris around how one person’s estimate is better than another’s; let’s just see the figures folks.

How markets may react is unclear; a strong number could be a good news is bad news effect in terms of rate cut pricing, while a weak number could be taken as a bad signal for the economy even if it strengthens the easing case. With market sentiment where it is at this moment, it could be a case of tails I win, heads you lose. I mean that both a strong number (that leans against a rush to ease) and a weak number (that feeds concern about the economy and the Fed being slow) could be taken negatively by risk appetite, making the best scenario a plodding down-the-middle reading.

If it’s a soft number, then it will also depend upon why in terms of considerations like breadth, the degree of substitution between hours and bodies etc. If it’s just a Hurricane Beryl effect howsoever small, then walk it off as the impact will be temporary. Challenger layoffs were very low last month and fell, so this could offset the storm effect.  

• Scotia: 205k
• Median: 175k
• Mean: 175k (so no skewness)
• Range: Most estimates range from about 150k to 220k
• Std dev: 23.5k
• Confidence interval: +/- 130k
• Whisper number: 170k
• UR: 4.1% median, tails skewed to 4%
• Wages: 0.3% m/m SA Scotia and consensus

Among the mixed drivers pieced together from other labour market readings are the following, bearing in mind that how nonfarm behaves often bears little resemblance to other indicators:

• consumer confidence ‘jobs plentiful’ slipped
• NFIB small business jobs ‘hard to fill’ increased
• NFIB small business hiring was stable at a higher three-month moving average than earlier in the year
• ISM-mfrg employment fell by about 6 points
• we won’t get the more important ISM-services employment gauge until next week
• ADP private payrolls were up by only 122k but offer poor tracking to nonfarm’s private payrolls component
• Challenger layoffs fell to about 26k, or about half the prior month’s layoff tally and the lowest in a year
• initial jobless claims were little changed between the June and July reference periods