NFP Reaction: Jobs data confirms recovery is stalling, Trump resumes attack on China and Canada, Dollar rebound continues, Oil slides, Gold rally takes a break
The non-farm payroll report confirmed economic data is plateauing and that the third quarter rebound everyone expected is not happening. The labor market did not deteriorate and risky assets along with the dollar initially rallied after the upward surprise in payrolls. Many traders were expecting a possible negative print, but that pessimism will only move to next month as that report will include much of the slowdown that stemmed from the virus resurgence in the second-wave states.
The US economy saw 1.763 million jobs created, the unemployment rate declined to 10.2%, and wages increased 0.2%, all better than their respective consensus estimates. High-frequency data however shows the slowdown increasing as the month went on so investors will quickly move past this report.
A coronavirus resurgence has led to a stalling of the economic recovery that likely intensified in the latter part of July. Small businesses continue to get battered and a lot of those jobs won’t be coming back. The pressure continues to grow for lawmakers to deliver more relief.
Trump Attacks
President Trump’s decision to sign executive orders to ban TikTok and WeChat from the US in 45 days sent a clear message that investors will see heightened geopolitical tensions leading up to the election in November. The White House is also considering a crackdown on US listed Chinese companies that do allow access to their internal audits. Chinese tech stocks got punished with WeChat’s owner Tencent leading the decline alongside China’s biggest chipmaker SMIC. Wall Street will remain on edge until China retaliates. You can basically throw the phase-one trade deal in the garbage. Crushed by the pandemic, China was coming nowhere close to meeting their obligations with soybeans, pork, airplanes, and LNG purchases, but now they might as well threaten abandoning the agreement.
Canada
A month ago, the US and Canada, Mexico too new trade deal went into effect, but that is not stopping ‘tariff man’ from protecting America’s national industrial base. President Trump’s decision to reimpose a 10% tariff on Canadian aluminum was not expected by anyone. Canada will likely retaliate swiftly and this will be another thorn in the outlook for the rest of the year.
Stimulus
Lawmakers still seem far apart on reaching a deal for further virus aid, so President Trump will likely need to sign executive orders by Saturday. High-level talks have made little progress over the financial aspect and policy area. The odds of a deal continue to dwindle, and it seems likely Trump will use executive powers to provide some parts of the stimulus proposals.
FX/Treasuries
The better-than-expect nonfarm payroll report further contributed in the dollar’s initial rebound. The economic recovery is likely to struggle from here on and out and that should keep real yields near their record lows. The dollar rebound was needed and will likely be temporary.
Treasuries were due for a pullback and this will likely be temporary. The 10-year Treasury yield is still holding onto the 0.50% level, up 0.2 basis points to 0.538%.
Oil
Crude prices pared earlier losses after an upward surprise in payrolls suggests the economy is still on the mend. The economic recovery is plateauing and while the headline figures look encouraging, when you dig deeper, too many Americans are leaving the labor force. Right now, the crude demand outlook seems to be crumbling as the US continues to escalate tensions with China and now also Canada. The sharp third quarter economic activity rebound is not happening and the only thing saving oil prices is OPEC+ reaffirming their commitment to production cuts. If Iraq and the other cheaters do not live up to their promises to make up for the shortcomings earlier in the year, oversupply fears will sharply drag down oil prices.
WTI crude seems vulnerable in the short-term and could see further weakness towards the $40 handle.
Gold
Gold prices whipped around after a surprisingly better-than-expected increase in jobs. Gold’s initial weakness following the report was short-lived as it became pretty clear that job growth is stalling and that too many Americans are leaving the labor force.
Gold’s record run needed a break and today’s employment report alongside uncertainty if lawmakers can reach a stimulus deal before the weekend, will be the excuse for the slight pause in the gold mania trade.
Safe-haven demand will remain strong as intensifying US tensions with both China and Canada will likely keep any gold pullback to be small over the next couple trading sessions.
Gold is poised for its ninth consecutive weekly gain and should continue its march higher once the dollar rebound ends. Gold should still target the $2300 level by year end, but could see further upside if the economy continues to head in the wrong direction.
