NFP beats expectations in July

• July’s nonfarm payrolls report from the US exceeded expectations as the net gain in jobs hit 943,000, considerably above the 900,000 consensus projection. There were also upward revisions to the previous month, which now recorded 938,000 jobs compared with the previous reading of 850,000. The report was positive across the board as headline unemployment fell to 5.4%, with drops across all strata of society. Wages were up 4.0% y/y and 0.4% m/m which is a positive for private consumption levels while unlikely to give the FOMC undue concern that wages will contribute to an inflationary upwards spiral. President Biden was swift to promote the figure as evidence of his administrations capable management since the start of the year, and it raises questions over whether this is the ‘substantial’ further progress the FOMC has been looking for before it tightens policy. There remains a chance that the Jackson Hole symposium this month will be the setting for a serious discussion around the end of tapering, but the Fed will likely be looking for more strong data points like this before making any decisive move. Some indicators recently have suggested that growth has already peaked, and while the July and August NFP reports were good, there remain some 5.8mn fewer jobs in the US today as compared to prior to the pandemic. Moreover, the rapid spread of the Delta variant of Covid-19 continues to pose a risk to the recovery while large portions of the population remain as yet unvaccinated.
• The Bank of England kept its bank rate on hold at 0.1% on Thursday and pledged to maintain its asset purchases at the same rate. However, the meeting was nevertheless more hawkish than anticipated as the MPC laid out a broad plan for monetary tightening as it cited accelerating inflation (which it expects to hit 4.0% this year compared with its previous projection of 2.5%). Where previously the bank’s plan had been to unwind its quantitative easing once the bank rate hit 1.5%, it now plans to no longer reinvest the GBP 875bn of government bonds after rates get to 0.5%.
• Kuwait’s budget deficit widened 174.8% to KWD 10.8bn (USD 35.5bn) in the fiscal year ended in March, exceeding our estimate of KWD 9.7bn. This represents a deficit of over 30% of GDP. The shortfall was driven by lower oil prices which contributed to a 38.9% drop in revenue, while expenditure increased only modestly at 0.7%.
• The Central Bank of Egypt kept its benchmark interest rates on hold at its Thursday meeting, the sixth consecutive MPC meeting with no change. This leaves the overnight deposit rate at 8.25%. The MPC’s statement acknowledged the recent rise in inflation (4.9% in June) which will remain under upwards pressure from unfavourable base effects and higher oil and food prices for the time being. The bank arguably has room to enact some cuts to support the economy given the relatively high real interest rate, but given that real GDP growth has been maintained throughout the pandemic (2.8% in fiscal 2020/21), it seems to be focusing on maintaining the attractiveness of its local debt offering.
• The Reserve Bank of India also kept its benchmark rate on hold at the close of last week, the seventh consecutive MPC meeting at which the repo rate has been maintained at 4.0%. The central bank reaffirmed its commitment to a loose monetary policy which will support the economic recovery from the Covid-19 pandemic, but it did raise its inflation forecast from an average 5.1% to 5.7% this year, nearing the upper bound of its tolerance range. The bank kept its real GDP growth forecast for the present fiscal year at 9.5%.
• Chinese inflation was mixed in July.  After dipping slightly the previous month, the much-watched PPI index came in at 9.0% y/y, higher than expectations of 8.8%, which was the June rate also. The m/m rate was 0.5%. CPI inflation fell to 1.0% y/y, down from 1.1% in June, but again this was faster than consensus had expected. The spread of the Delta variant of Covid-19, alongside new related shut-downs and also flooding in parts of the country have disrupted economic activity in China in recent weeks.

Today’s Economic Data and Events

No major economic events or data releases today

Fixed Income

• US Treasuries fell for the first time in six weeks last week as a stronger-than-expected nonfarm payrolls report helped to lift yields at the end of the week. Yields had generally been volatile though the course of the trading week, falling at one point to just 1.1258% on the 10yr even as hawkish commentary from some Fed officials buffeted the market.
• The strong July NFP helped to bring yields up across most of the curve with 2yr UST yields rising by more than 2bps over the week to 0.2083% at the close while the 10yr added more than 7bps to close just shy of 1.30%. The strong NFP may reinvigorate market expectations that Jackson Hole could be in play as the event when the Fed announces how it will end asset purchases and market expectations of rate hikes in 2022 and early 2023 did nudge higher by the end of the week.
• Beyond the US, gilts were the other notable mover as the Bank of England’s MPC alluded toward a need to raise rates to cut off inflation. Yields at the front end of the GBP curve moved up almost 8bps on the 2yr to 0.132% while 10yr gilts added almost 5bps to settle at 0.61% at the end of the week. Elsewhere bunds displayed some volatility with yields plunging mid-week before ultimately settling near unchanged.
• Emerging market bonds closed little changed even as there was a general upward bias in yields in the markets in our universe. The Reserve Bank of India kept policy unchanged as expected at its August meeting but there was some disunity among voting members. The RBI also revised up its inflation forecast for the current fiscal year as price pressures have been rising. Yields on 10yr Indian government bonds closed the week nearly 3bps higher at 6.23%.
• South African yields closed higher on the week, up 13bps to 9.313%, after the government announced a cabinet shuffle. Enoch Godongwana has been named as a new finance minister.
• Central banks are generally quiet until the end of the week when the Philippines, Turkey and Mexico set policy.

FX

• After a choppy week the dollar surged on Friday in response to the strong July NFP report. The DXY index closed up 0.68% last week, settling at 92.8 as USD yields moved higher and rate hike assumptions moved forward. While we are still expecting early 2023 as the most likely scenario for a first Fed hike, should the July NFP presage a string of strong data, it could reorient our views on the dollar toward near-term strengthening.
• A casualty of the dollar’s jobs-related boost was the Euro which sank throughout the week, finally settling at 1.1762 and down 0.9%. The slip comes aside otherwise decent data for the Eurozone in recent prints as vaccine rollouts allow for some normalization of activity.
• Elsewhere the declines against the dollar were similarly widespread with USDJPY rising 0.48% to move back up above 110 level while sterling is pulling further away from the 1.40 level, falling by 0.23% last week.
• Both AUD and NZD were the notable standouts in that both managed to gain over the week thanks to hawkish sentiment around upcoming central bank action. AUD rose 0.16% last week to close at 0.7356 while the NZD was up more than 0.5% to settle at 0.701.

Equities

• Both the S&P 500 and the Dow Jones closed at new record highs on Friday, gaining 0.9% and 0.8% w/w respectively. US equity markets were largely boosted by the stronger-than-expected NFP report on Friday. The exception was the NASDAQ, which dropped off the record high it had hit on Friday. The prospect of sooner tightening potentially affects the value of some of the tech stocks on the index.
• There was more risk-on tone in global equity markets generally last week after the disruptions caused by Chinese regulatory changes previously. While the Shanghai Composite did lose -0.2% on Friday, it closed the week up 1.8% w/w (but remains down -1.9% m/m). The Nikkei also recouped some of its losses with a 2.0% w/w gain, but is still -0.4% lower than where it was a month ago.
• Moves in European equities were muted ahead of the NFP report on Friday, but there were some sizeable gains over the week. The composite STOXX 600 added 1.8% over the period, but the standout gainer was the CAC which gained 3.1% w/w. Italy’s FTSE MIB added 2.5%, the FTSE 100 1.3% and the DAX 1.4%.

Commodities

• Oil prices recorded their largest weekly decline since last October as soft industry data out of major Asian economies spooked markets while rising caseloads of the delta variant of Covid-19 create worries over the sustainability of demand in coming months. Brent futures fell 7.4% last week to USD 70.70/b while WTI was off by 7.7% to USD 68.28/b.
• Market reports from OPEC, the EIA and the IEA will be in focus this week with attention likely to fall on how they assess the effect of the spread of the delta variant along with the OPEC+ plan to incrementally add barrels back to the market.
• Time spreads softened considerably in the last week as markets grow anxious about demand conditions in coming months. For Brent futures, 1—2 month spreads fell to just USD 0.38/b at the end of the week compared with nearly USD 1/b a week earlier while for WTI the spread fell to less than USD 0.20/b.
• The jump in UST yields at the end of the week helped to sink gold prices. Gold fell 2.3% on Friday alone, taking spot prices down to USD 1,763/troy oz while the rest of the precious metals complex also moved lower. Industrial metals endured more moderate losses, largely on the back of a stronger dollar.

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