Asia Open: NFP, you can not underestimate just how much this data beat will dominate the financial market in the coming weeks
US equities surged higher Friday, S&P rising 2.6%. Risk-on sentiment took hold after a massive beat on US payrollsfor May. Against an expected decline of 7.5mn, payrolls rose 2.5mn, and the unemployment rate fell to 13.3%. Treasuries sold-off further, taking 10Y yields up to 0.9%, highest since March 19, and 2s10s steepened, also to the highest since March 19.
The May NFP data delivered the most significant upside surprise on record. You can not underestimate just how much this data will dominate the financial market in the coming weeks given the massive jobs pivot coincides with figures showing that foot traffic is starting to recover at retail and recreational establishments. Those are the economic sectors that have seen the most significant job losses and could turn around quicker than expected, which will provide the virtuous circle in the US employment data and further boost investor sentiment. There is nothing like the sound of department store cash registers ringing to augur the consumer-driven recovery.
The data surprise should be a significant boost for all risk assets as consumption and growth expectations get recalibrated higher with few if any caveats.
Oil prices are surging out of the gates this morning as traders start to factor in the plethora of upside risks to their near and medium-term price forecasts.
In addition to the stellar US jobs data, which on its own would have heralded in an oil market rally cry, the OPEC + meeting managed to beat the market expectations by introducing unprecedented penalties for under compliance, which is unequivocally bullish for oil markets.
Although the whole OPEC/OPEC+ meeting build-up is always a messy process and more public than it probably needs to be, at the end of the day, the market is pleased more crude oil is off the market than the scheduled 7.7Mbd (down from 9.7Mbd) from July 1.
The process of pressuring lower compliance participants led by Saudi and Russia will quicken not only the pace of rebalancing but also boosts market sentiment as it signals a unified OPPEC +front. And amplifying the agreement as far as prices are concerned, Saudi Arabia has raised the selling prices for its crude grades to all destinations for July.
WTI futures look set to fill the open gap created on March 9. Once achieved, oil’s upward trend is likely to gain further traction following the OPEC+ alliance’s extension of its output-cut deal.
With the next OPEC+ meeting scheduled for December 1 in Vienna, monthly JMMC meetings will monitor market developments and OPEC+ compliance behavior, which has helped with the price rebound. Full recovery will need continued supply discipline, but also demand recovery plus time to work off inventories and spare capacity.
Lower unemployment, which may continue to fall, implying a rebound in spending will be sooner and faster. So, to the degree, this benefits the market’s risk-on views, especially increasingly positive sentiment around reopening data could deter investors from buying gold — more so those that were using gold as a hedge against falling stock markets. Not to suggest stock markets are not going to have their ups and downs navigating a recovery, it’s just that a return to the S&P 500 2500 -2750 level the prophets of doom have been preaching is unlikely to happen with the jobs data performing so strong.
With dollar depreciation well under train, it will be interesting to see how the market follows through on the sturdy US jobs report and whether it will throw the proverbial monkey wrench into the works over the short term. But unquestionably, the better than expected NFP will raise the level of intrigue into the FOMC meeting two folds as the better jobs data may give the Fed cause step away from a focus on crisis prevention towards more traditional goals.
The market was expecting the NFP to confirm the textbook setup for anchoring a weaker USD bias. But the positive economic surprise could form the base to trigger a bit more bond selling, and USDJPY buying on follow through.
However, last week FX traded in full sympathy with risk sentiment. With equities consistently trading in the green (S&P YTD is down only ~1.2%!), every currency in the G10 space apart from JPY and CHF was up vs. the USD.
So, while bearish US dollar activity could ease up a touch into the FOMC, but if it’s still all systems go on the equity market front and since there should be nothing of note on the rate differential front from FOMC that could significantly reverse this dollar sell-off. Based on the fact the currency markets are trading in concert with risk sentiment, more dollar weakness should remain the path of least resistance.
The Aussie dollar and the Canadian dollar will both benefit from positive risk sentiment and tighter oil balances after the constructive outcome from the weekend OPEC meeting. Indeed, happy oil markets make for buoyant currency markets. The impact of higher oil prices is leaving a profound effect on commodity-producing currencies. Persistent declines in implied US equity volatility against the backdrop of stabilizing oil prices are a powerful and sturdy combination.
AUDUSD rallied 5% last week and AUDJPY nearly 7% in sympathy with the risk sentiment.
The stream of positive news supporting the EUR has not stopped this week, and the bullish sentiment remains.
But it is the marriage of monetary and fiscal policy, something that was absent in the Draghi regime that resonates. In fact, It is a dream come true for the markets that have been waiting for an agreement on debt sharing since the advent of the single currency. Indeed, this is a big deal.
Last week has marked the return of USDJPY topside interest, after several weeks of persistent downside interest. The move higher in spot and the risk sentiment has spurred, at last, some topside interest in the second part of the week.
Also, the global investor’s insatiable chase for yield is helping Asia high yielders. USDIDR has been heading south, and downward momentum has accelerated this week with record top subscriptions to Tuesday’s bond auctions, signaling improving risk sentiment and inflows into high-yield local assets. BI’s decision to keep the target rate on hold at its last meeting is also helping the move lower in the spot.
USDCNH finally traded lower to catch up with the broad dollar moves but is still lagging, and the CNH index has continued to weaken
The Ringgit should look good on several fronts this week, the positive outcome from OPEC aside. Having the weekend to digest the RM35 economic plan designed to cover ” Main Streets” back, will be well received. With improving risk sentiment, equity, and currency market volatility decreasing, investors hunt for yield will have them checking out catch up trades across the region, where the MYR could benefit in the context of improving sentiment across regional peers.