The Daily Update: The Week Ahead

We started the week with markets digesting the better-than-expected Non-Farm Payroll numbers. 934k jobs were added against an expectation of 870k along with a further 119k from previous revisions. The unemployment rate fell from 5.9% to 5.4% and hourly earnings came in at 4% year on year, a very strong report which now has some commentators looking towards tapering talk from the Fed. A stronger dollar also post the US nonfarm payrolls data weighed heavily on commodities, with gold selling off as much as 4% and silver slumping as much as 7% before paring some of those losses. Oil was also on the back foot as concerns grew for the demand outlook given the recent Covid resurgence. EURUSD fell to a four-month low of 1.1743.

Following on from the numbers we had a couple of Fed members giving their opinions on the path forward for the central bank. We had Fed’s Bostic saying that they needed to ensure they were beyond the crisis before any hike rates, and must also ensure the US doesn’t have a ‘price crisis’. In Q&A, he said that he is in the 2022 camp for rate hike start, adding that they may be at the goal target now of 5-yr core PCT at 2%. On tapering, he is in favour of going ‘relatively fast’, and the progress goal is met if 1-2 more months of July like jobs growth occurs. However, if the delta variant proves challenging the taper path can be pushed back. The Fed’s Barkin stated demand had not yet been impacted by the delta variant, however, pressure on wages is ‘intense’ among lower income levels. He added inflation expectations have been impressively stable, and it is ‘fair to say that the economy has made progress towards its goals’. He said that there is still more room to run in the labour market, and sees progress on goals met regarding prices, but not labour. Treasury yields rallied 7bps on the back of the comments.

Mid-week the markets were on the quiet side as we waited for US CPI. After the big sell-off in gold, silver and oil over the last few days, it was Iron Ore’s turn, The five-day losing streak has shaved 12% of the price and more than 25% lower since mid-July. Germany's August ZEW survey was weaker than forecast. The expectations component fell to 40.4, the market was going for 55. This brings it back to last November levels, which itself was the weakest since April 2020. The Senate passed the $550b infrastructure plan which means that the biggest spending spree on US public works in decades ($66b for trains, $65b for high-speed internet, $73b for clean energy, etc) is ready to be sent to the House of Representatives for a vote.

The US CPI numbers were very much steady as she goes. Month-on-month CPI edged higher at +0.5% in July, in line with expectations, after the 0.9% move in June. The core metric, ex food and energy, advanced 0.3%, slightly below estimates of 0.4%. On a year-on-year basis, the CPI increased 5.4%, a touch above market surveys whilst year-on-year ex food and energy came in on the nose at 4.3%.

We also had a humdinger of an auction. The US Treasury auctioned USD41bn new 10-year bonds. Not only did the auction come over 3bp through the current 10 year, indirect bidders took over 77% of the issue and left primary dealers with less than 10%, the lowest dealer take since at least 2000.

On Thursday we had US PPI number, which came in firmer than expected, posting another 1% gain, above the market consensus of 0.6%, not that it had any effect on yields or equities, both of which were muted. After the rip roaring 10-year auction earlier in the week we had USD27bn of 30-year bonds on the slate. The auction tailed the current 30-year by 1 bp and indirect bidders took down 60.7%. all in line and unexciting, although certainly not bad in terms of overall performance.

Friday the 13th is supposed to be ominous, but for equity markets either side of the pond it was anything but as many closed at their all time highs or were very close. We had the University of Michigan’s consumer sentiment index. The headline index tumbled 11 points to 70.2 (consensus 81.2), leaving it at the lowest level since December 2011 (previous pandemic low was 71.8 in April 2020). The expectations index also plunged nearly 14 points to a new low for the cycle of 65.2, while the current conditions index fell by ‘only’ 6.6 points after a 4.1 point drop in July. On the back of the numbers UST’s rallied in choppy markets, with the 10 year closing at 1.27%.

This week in the US we have the FOMC minutes from their July meeting. In terms of data we have Retail Sales, Industrial production and Housing releases. Scheduled Fed speakers are Powell and Kashkari and we have supply in the shape of $27bln of 20 year UST and $8bln of 30 year TIPS. In Eurozone we have a relatively quiet calendar indicators including EC PPI and GDP German CPI the focus, most likely eyes will be on the PMI manufacturing data the following week. In the UK we have inflation releases Retail Sales and further housing data. Japan’s GDP for Q2 was released this morning at 1.3% annualised Q/Q along with June IP which was up 6.5% on the month, later in the week we have Core Machine orders and CPI data. China retail sales and industrial production numbers both missed earlier this morning.