US stocks suffered large losses yesterday due to the rise in government bond yields, which was triggered by concerns that higher inflation is on the horizon.
Today’s US non-farm payrolls report is likely to be the main event of the session as it will give us an update of the country’s recovery, and it will be closely watched in light of the big equity declines seen yesterday.
The survey carried out by Reuters, shows that economists are expecting the February jobs report to be 182,000, which would be a big increase on the 49,000 jobs added in January, details will be posted at 1.30pm (UK time). Unemployment is anticipated to hold steady at 6.3%, while the yearly average earnings metric is tipped to cool from 5.4% to 5.3%. Historically, a dip in earnings would be viewed as negative for the economy but in the current climate it could be a sign that lower income workers have returned to the labour market. The participation rate will also be in focus, the January report showed that it ticked lower to 61.4%. A fall in the rate could be down to some people giving up on actively looking for work. Should the participation rate increase and the unemployment rate fall that would suggest the labour market is strengthening.
The jobs data that was revealed during the week was largely downbeat. The ADP employment reading for February was 117,000, which missed the 200,000 consensus estimate. There was an increase in the jobless claims report from 736,000 to 745,000. In the US, the services sector accounts for roughly 70% of GDP, the employment metric of the ISM non-manufacturing update cooled from 55.2 to 52.7, which essentially mirrored the dip in overall activity. There was some positive news in the week as the employment component of the ISM manufacturing report rose, but that industry doesn’t carry as much weight as the services sector.
Given that stocks have sold off due to fears about higher inflation being in the pipeline, a healthy jobs report might prompt dealers to trim their equity positions. On the other hand, a disappointing update could be interpreted as a sign the recovery is running out of steam, so the Fed will need to maintain its extremely loose monetary policy and that could assist sentiment.
Stock markets in Europe had a mixed finish yesterday as concerns about firmer bond yields impacted equities once again. The FTSE 100 and the DAX 30 posted modest losses, the CAC 40 essentially ended the day unchanged, while the FTSE MIB posted a small gain. The tick higher in the US 10-year yield was playing on traders’ minds throughout the day but there was a sharp move higher in the yield following the update from Jerome Powell, the head of the Fed.
Mr Powell reiterated that the US central bank is a long way from achieving its goals, but he feels that job creation will pick up. The central banker anticipates higher growth, and with that, he cautioned about a temporary rise in inflationary pressure but for the now he doesn’t think the move higher in inflation will be large enough or last that long to warrant a tightening of monetary policy. There was a jolt higher in the US 10-year yield following the inflation comment, in fact, the yield hit its highest mark since late February.
Selling pressure on US stocks increased in the wake of the moves in the bond market. Lately, tech stocks have been under fire and we saw even more of that last night. The NASDAQ 100 traded at a level last seen in early December, while the S&P 500 hit a one month low.
The Chinese government announced that it plans to target growth of over 6% in 2021, last year it expanded by 2.3%. Markets in Asia endured declines on account of the US sell off, European indices are set for a negative start.
Equities were hit by US bonds but on the other side of the coin, the US dollar index was driven to a three month high. It was guided higher by yields and the flight to quality play was a factor too.
Gold traded below the $1,700 mark on account of the rally in the greenback. During the day, copper was already in the red but selling intensified thanks to the firmer dollar, it was a similar situation with platinum.
WTI and Brent Crude oil jumped by over 4%, hitting 14 month highs, as it was confirmed that OPEC+ decided to maintain the bulk of the existing production cuts. Even though the oil market has risen recently, the group still feels the recovery from the health crisis is fragile. Russia and Kazakhstan were given the green light to lift output by a small amount as a way of satisfying local demand. Saudi Arabia will hold steady with its voluntary 1 million barrel per day production cut, the Kingdom will unwind its output cut in the months ahead.
German factory orders at 7am (UK time) are tipped to show 0.7% growth and that would be a big rebound from the 1.9% fall posted in December.
The Halifax HPI update for February is expected to show 0.0% growth, while the previous update was -0.3%. It will be posted at 8.30am (UK time).
EUR/USD – while it holds below the 50-day moving average at 1.2136, the recent bearish move should continue. A move below 1.1952, might bring 1.1800 into play. A break above 1.2242 should bring 1.2349 into play.
GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last week. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3744, the 50-day moving average.
EUR/GBP – has been in a downtrend since mid-December, last week it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.
USD/JPY – has been in an uptrend since early January, yesterday it hit an eight month high. If the positive move continues it could target 109.85. A pullback from here could find support at 105.48, the 200-day moving average.