Impressive NFP report, yields and dollar surge, oil higher, gold tanks, ethereum dominance

The Fed will be pleased with this payroll report and will likely seek one more robust reading before announcing tapering at the September policy meeting. Yes, the Fed said the will continue to assess progress in the coming meetings, but if the unemployment rate falls to 5.1% before the September meeting, they could move earlier. The US labor market recovering is entering high gear after adding 943,000 jobs in July, a decent beat of the 870,000 consensus estimate. The range of estimates was wide, varying from 350,000 to 1.2 million jobs.

The Fed will be especially encouraged by the strong declines in both temporary layoffs and permanent job losses. Temporary layoffs declined by 572,000 to 1.2 million, while permanent job losses fell by 257,000 to 2.9 million (which is still above the 1.6 million seen in February 2020).

The unemployment rate improved to 5.4%, a beat of the 5.7% estimate, and very close to the 5.1% level which could be the level the Fed will need to see reached before formally announcing its taper plan.

Wall Street can now comfortably price in a taper start date before the end of the year, with an accelerated reduction of purchase finishing sometime next summer.

Inside the NFP report

The bar was set very high today and economy delivered. Leisure and hospitality jobs increased by 380,000. More money is coming into the economy as wages and hours work rise, but inflationary fears might be easing given its lower paying jobs.

No one will really focus on seasonal factors, but it is important to note that the report stated that “staffing fluctuations in education due to the pandemic have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in July.”

Stocks

US stocks are mixed following an impressive jobs report that triggered a return of the reopening trade and alleviated some inflationary concerns. The Russell 2000 index was the outperformer given the buying spree of reopening stocks. The Nasdaq turned underperformed given the surge in Treasury yields, while the S&P 500 barely held onto gains.

FX/treasuries

The dollar is surging following a better-than-expected nonfarm payroll report which may have paved the way for the Fed to announce tapering if the economy delivers one more robust report in September. The steepener trade is back as Treasury yields soar higher. The 10-year Treasury yield seems destined for 1.30%, with further upside likely targeting 1.35% over the next week or two.

Oil

After what was a brutal week for oil markets, crude prices are trying to hold onto small gains after a robust nonfarm payroll report supports the idea that the world’s largest economy is strengthening. A stronger dollar however will likely prove to be a big drag over prices in the short-term. The crude demand outlook has many headwinds ahead given COVID variants, but that should not move the oil market away from its deficit.

Vaccine mandates across Corporate America could help further get COVID under control which should support the demand outlook going forward.

It is important to note that earlier reporting from the Wall Street Journal’s Norman sources that Iran was committed to return to meaning Iran talks in Vienna. His tweet was deleted. The supply outlook for crude remains very uncertain, but it seems we could see a more conciliary tone out of Iran which could support the expectation that sanction relief could happen closer to year end.

Gold

Gold prices did not stand a chance following this very strong nonfarm payroll report. This employment report was terrible for gold as it did not support needs for safe-havens and given a good chunk of the wage gains is from low-paying jobs, it did not do much for driving inflation hedges.

Gold could have further downward pressure as Fed tapering bets grow following this strong NFP beat, upward revisions, and strong declines with both temporary layoffs and permanent job losses.

Gold is in the danger zone after breaking below key moving averages, longer-term trendlines, and prior support levels. Gold may find some support from the $1,750 level, but if that breaks prices could tumble towards the psychological $1700 level.

Cryptocurrency

A massive upgrade for Ethereum should prove to be very bullish for the cryptocurrency’s long-term outlook. The pace at how tokens are minted has been lowered, which will help make it a little bit more scarce, but nothing like Bitcoin’s finite 21 million coins. Ether’s tackles lots of key issues as it delivers lower fee volatility, improved market efficiency, and takes aim at reducing the network’s energy consumption by more than 99%, which would make it the greenest choice for the cryptoverse.

Once Wall Street gets beyond the market volatility from a potential mini taper tantrum from the Fed, Ethereum dominance could continue as ESG investors become ready to embrace the dramatically improved energy consumption outlook. Ethereum will likely become the favored crypto trade on Wall Street and could see limited resistance towards the $3000 level.