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US job report and G20 meeting in focus
NFP will grab attention today
The opening of the G20 meeting today will most likely be completely sidelined by financials since, as usual, no key decision will be taken there. Maybe we’ll get some action should Donald Trump make another incredible declaration that only he knows how to make. The key event this Friday is the June US jobs report which is due for release at GMT 12:30. After disappointing substantially last month as it printed at 138k versus 182k median forecast, June’s non-farm payrolls are expected to come in at 178k.
However, the fact that the continuous improvement of the past months in the job market has failed to translate into sustained wage pressure has considerably diminished investors’ interest for this data. Average hourly earnings are expected to have risen 2.6% y/y last month, compared to 2.5% in May. Finally, the unemployment and participation rate should remain stable at 4.3% and 62.7% respectively.
EUR/USD inched up 0.75% yesterday and is on its way to test the 1.1445 resistance from June 30th. We remain constructive on the euro as we anticipate the ECB is finally on its way to start talking - even cautiously - about reducing its support to the economy, while the Federal Reserve will likely be forced to slow down its tightening pace against the backdrop of weakening inflationary pressure.
G20: What to expect?
The G20 meeting is always a good occasion to get economic and geopolitical visions of world leaders regarding key topics such as the global recovery. Today and tomorrow, the leaders will meet in Hamburg. It will be very interesting to see the first time Donald Trump and Vladimir Putin will ever meet in person.
We expect to see what will be the nature of Trump’s message and in particular the nature of global relations in the future, especially relations between Russia and the US. Other important topics such as the migrant crisis or the climate should be discussed but this won’t likely have any impact on markets. We recall that Trump exited the Paris Climate Agreement and further negotiations on climate should at some point take place.
For the time being, stocks are sliding lower and we believe that markets will remain stable today waiting for further developments. Declarations about the global economic recovery and estimation of the potential risks that are threatening growth are definitely important. Markets are calm in the beginning of the summer and this G20 may disrupt it.
Global yields rally
Markets have hit a reflection point on central banks' reflation trade. Perhaps reflation is not the correct term since policy makers are not waiting for inflation to reach satisfactory levels but rather are using the solid economic outlook to unwind extreme policy measures.
Market movements for most of the summer have been lacking historical recognisable patterns. However this week, particularly, behaviour is starting to exhibit identifiable trends. Bond yields are rising globally, driving FX and equity markets (slow motion taper tantrum). Traders are slowly liquidating low yielding G10 and high beta EM currencies. So far the move has been orderly, however, it’s easy to see how the rotation could change to disorderly.
The BoJ were forced to intervene as 10yr JGBs hit the upper threshold of curve control strategy at 10bp. The Japanese central banks offered unlimited quantity of 10yr JGB at 11bps. The decisive move highlights the BoJ’s commitment to achieve its 2% inflation target and pinning the rate curve long-end.
Investors are now convinced that for a majority of G10 central banks, the next move will be tightening. It may be represented by subtle shifts in language that removed the probability of lower interest rates or additional asset purchased but comments can have tightening effects.
Speculations of the ECB exit has weighed on German equity markets despite Draghi’s efforts to backtrack from original statements. Despite the summer heat, traders should be wary that a shift in monetary policy regime generally have extreme consequences in financial markets. As yield differentials widen, watch for carry heavy positions to unwind while in-stock interest rate sensitive sectors such as real estate and construction will come under selling pressure.