Markets
Global trading yesterday followed a logical wait-and-see script ahead of today’s US payrolls that are supposed to bring a hint whether conditions are ripe for the Fed to start tapering bond purchases. Data (higher-than-expected EMU PPI at 12.1%) and slightly better-than-consensus weekly US jobless claims (340k) were not able to inspire any directional market moves. The rise earlier this week in especially European yields, remained on hold. The US yield curve flattened slightly with long term yields (30-y) declining up to 1.4 bp. German yields eased in a similar fashion. On FX markets, USD caution prevailed. The DXY TW index dropped further below the 92.47 support/neckline (close 92.23). EUR/USD continued its 2-week uptrend (close 1.1875). A persisted mild risk-on context again caused USD/JPY to decouple from this USD downtrend. The pair is going nowhere in the 110 area. With little in the way of high profile UK news EUR/GBP again challenged the 0.86 barrier, but for now the test failed (close 0.8585). Equities maintained the slow, but protracted uptrend with new all-time record levels for the S&P500 and the Nasdaq.
This morning, two topics are capturing Asian traders’ attention. After the manufacturing gauge on Wednesday, the Chinese Caixin services PMI also tumbled far into contraction territory (46.7 from 54.9), dragging the composite measure to 47.2. The yuan weakens slightly (USD/CNY 6.4595). In Japan, PM Suga announced he will not lead the LDP at the upcoming election (cf infra). A local risk-on slightly weakened the yen with USD/JPY returning north of 110.
All eyes are on US payrolls. Key question is whether job growth will be strong enough for Fed Chair Powell (and a majority in the MPC) to conclude that, next to inflation, employment also fulfills the test of ‘substantial further progress’ needed to start tapering of bond purchases. We think that the Fed is very close to announce a reduction at the September meeting. However, after Powell’s cautious Jackson Hole speech, markets aren’t convinced yet, putting US yields in a holding pattern. In this context, markets probably need a (very) strong payrolls report (consensus 725K) to trigger a new uptrend in yields and to reverse recent USD-correction. Recent survey evidence indicated ongoing disruptions in the hiring process (mismatch between supply and demand). So, a big payrolls beat maybe isn’t that evident. If so, the US 10-y yield might hold its consolidation pattern with the 1.37% range top remaining a tough resistance short-term. In such a scenario, the USD correction might also continue. For the DXY TW index, next support comes in at 91.78 (end July correction low). The comparable level for EUR/USD stands at 1.1909, with 1.1975 next reference in case of a break. Even in case of a rather soft US payrolls report, we expect fairly solid downside protection for German/EMU yields ahead of next week’s ECB meeting.
News headlines
The EU still has not approved Poland’s (and Hungary’s) request for almost €24bn in EU grants and another €12bn in loans under the NextGen recovery initiative, even though the two-month deadline to do so has passed. A judicial overhaul has brought Poland at a collision course with the EU with the latter ordering some elements of the reform to be suspended. Poland’s finance minister said the stand-off should be decoupled from the financing but that it wasn’t affecting spending plans yet as Warsaw was already “building the virtual infrastructure for the projects”. In a separate report, Poland’s Supreme Court again failed to provide guidance to Polish banks over how to deal with the lawsuits over some $26bn of non-zloty home loans. The tribunal has now asked the EU’s top court to help it resolve the issue. It’s the fourth delay already this year, caused by the lack of cooperation between judges appointed before and after the judicial reforms.
Japan’s PM Suga is planning to resign and that he won’t run for leader of the ruling Liberal Democratic Party later this month. Suga said he cannot both deal with the coronavirus while campaigning for the election. Suga’s approval ratings have plummeted since he took over from Abe in September 2020 over corruption scandals, controversies around the Olympics and a sluggish response to Covid. Foreign minister Kishida already said he’s up for the leadership contest, the only one for now to have publicly announced to do so. He vowed to spend more to tackle the virus. Japanese stock markets propel almost 2% higher after the news got out. Local risk-on hurts the yen.
