US stocks finished another record-breaking and positive week last week, very much on the back foot after the August payrolls report caught investors on the hop by coming in much lower than anyone had expected, at 235k. It also sent the US dollar to a one month low against a basket of currencies, ahead of today’s US Labor Day holiday.
Friday’s disappointing US payrolls report was a wake-up call if one were needed that the slow road to economic recovery from the pandemic is unlikely to be an easy one, and is likely to take a few awkward twists and turns along the way.
The August report, the second worst report this year, saw a big slowdown in hiring to 235k, over 500k below expectations, with hiring in the leisure and hospitality sector coming to a shuddering halt, due to the sharp rises seen in Delta variant cases across the country.
On the plus side we did see upward revisions to the June and July report, which helped bring the unemployment rate down to a pre pandemic low of 5.2%, while the participation rate remained unchanged at 61.7%.
It is becoming increasingly clear from the data that the US economy has hit a bit of a soft patch in terms of confidence, as well as demand in the past few weeks, and this appears to be what is being reflected in the latest numbers.
If, as expected, this trend turns out to be temporary then it is unlikely to make that much difference to the Federal Reserve’s plans to start tapering its bond purchase program. That will still happen, with the only question being over the timing, and what Friday’s numbers have done has ensured that it’s unlikely to happen in the next couple of months, with the end of the year now being the most likely option.
Recent jobless claims numbers would appear to support the belief that hiring trends in September have improved, while job vacancies are still at record levels of near to 10m by some estimates. With most unemployment assistance stimulus measures due to expire today; this could see a significant uptick in hiring in the next few weeks.
As we look ahead to the new week the main focus now shifts towards the European Central Bank rate meeting on Thursday, with some questions being increasingly raised about the pace and sustainability of its bond buying program, after CPI jumped to a ten year high of 3% last week. This jump in CPI is causing quite a few governing council members to shift uncomfortably in their seats, particularly those in northern Europe.
Nonetheless it’s unlikely to mark a change in tone or stance by the ECB given the current fragile nature of the European recovery story, which is already starting to show signs of slowing, with concerns over a slowdown in China also likely to gain traction this week as well.
For today the latest Germany factory orders data is expected to see a decline of -0.7% in July, after a strong end to Q2 saw a rise of 4.1% in June.
The latest UK construction PMI is expected to see a slowdown from 58.7 in July to 56 in August.
Asia markets have started the week on the front foot with the Nikkei 225 continuing its big rise on Friday with another positive session. The resignation of Japanese PM Yoshihide Suga, now sets the wheels in motion for an election by the end of the year, after his popularity plunged as a result of the government's shambolic Covid-19 response.
His departure also opens up the prospect that a new leader will embark on a new stimulus program, with one of the main challengers and front runner Fumio Kishida pledging a new program of measures worth trillions of yen. With the Nikkei 225 hitting a four-month high as a result of Friday’s sugar rush, and US markets out for a bank holiday European markets look set to pick up where they finished off last week.
EURUSD – failed to overcome the 1.1910 resistance area last week, keeping the recent range intact. The 1.1780/90 area remains the key support area, and we could see a drift back lower. We need to overcome the 1.1920 area to retarget to the 1.1975 level.
GBPUSD – fell just short of the 1.3900 area and could well slip back towards the 1.3820 area. As long as we hold 1.3820, we can see a move through 1.3900 towards 1.4000. Trend line support at 1.3770 needs to hold for the current rebound to continue, or risk a move back to the 1.3680 level.
EURGBP – failed to move beyond the 0.8600 area keeping the onus on for a retest of the 0.8550 area. Below 0.8550 retargets 0.8520.
USDJPY – could see a retest of the 109.10 area, having failed to hold onto the move above 110.00 last week. A move below the 109.10 area targets the 108.60 area.