Looking ahead to payrolls as markets bounce on China / US truce

Equity markets have started the week on an upbeat note, after a bumper round of earnings reports in recent sessions have helped to boost sentiment. A relatively sanguine Fed meeting last week, that kicked the tapering can down the road to this month’s Jackson Hole central banker’s symposium, and some signs that China will pause its intervention in some of China’s largest companies, has also helped to calm markets as we move into August. US stocks have opened higher at the start of the week, after US indices posted their sixth straight month of gains for July. The mood music in Washington is also helping to boost sentiment at the start of the new month, as the US Senate looks like it will complete work this week on the $1 trillion infrastructure bill. This is a keen reminder that fiscal stimulus is still in the US system and can continue to boost financial markets after some commentators worried that its demise could drag stock markets lower. Also, a raft of Federal Reserve bankers spoke at the weekend, including Neel Kashkari and Lael Brainard, who warned on economic risks and that big progress needed to be made before the US’s employment outlook improved to such an extent that monetary tapering could be considered.

Corporate earnings still in focus 

This week there is a raft of economic data and more corporate results. In the US, results to watch out for include Uber and General Motors later this week. We expect Uber to post a decent set of results, although profits may remain elusive. This is because the comparison to last year, when the pandemic decimated revenues at Uber, will make this year’s results look extremely attractive, also because the US economy was open and powering on all cylinders last quarter, which should be good news for the ride hailing app. As we saw with some results in the tech sector last week, unless there is a positive economic outlook for Q3 and beyond, stock prices can still sink even if Q2’s results are strong. Apple’s share price sunk last week after it announced a weaker outlook for future earnings, however, it managed to claw back losses and posted a meagre gain for the week of 0.15.

Uber’s quest for profit continues 

Uber’s stock price bucked the market trend and fell in July. It’s share price also fell sharply last week after SoftBank said that it would sell one third of its stake to cover losses on its investment in Chinese ride hailing company Didi. Uber is also an investor in Didi, and its stake declined some $2bn last week on fears that the Chinese government would limit its business operations, after Beijing has intervened to limit the growth of high-profile companies in recent months. Its share price dropped $5 last week, and the stock price has struggled in recent months. We think that the path of least resistance is for more downside for Uber, however, if the ride hailing app can post stronger than expected earnings data later this week, then we could see a short-term recovery rally. The market’s reaction to Uber’s results will be a good litmus test for overall sentiment towards tech unicorns who have yet to post profits. In the current environment - the fragile stage of the reflation trade - we believe that investors are not broadly interested in buying tech firms. While big tech is an important part of most professional traders’ portfolios because of the defensive qualities that they possess, this is largely down to their ability to produce strong revenues in any economic environment. Tech companies that cannot do this are not treated the same way as the FAANGS of this world. There is a two-tier system in the Nasdaq, and Uber is very much in the second tier. 

Will payrolls support the Fed’s argument? 

In focus this week will be final July PMI readings and the US ISM reports. However, traders are more likely to focus on the US labour market report, which will be released at 1330 BST on Friday, and stocks could drift until we get this important monthly gauge of the extent of the recovery in the US labour market. Economists expect 859k jobs were created last month, which, if correct, would suggest that US job growth is on an upward trajectory after a reading of 850k for June and 583k for May. The unemployment rate is also expected to have fallen to 5.7% from 5.9%. in June. While Covid infection rates are surging across the US, economists expect job growth to continue, and some of the 9.2 million job openings in the US to continue to be filled in the coming months. Wage growth is worth watching, as some sectors are competing for labour. Wages grew 3.6% last month, which is negative in real terms (when adjusted for inflation), however, look out for another large monthly increase. If wage pressures look like they are building quickly, then we may see inflation fears grip markets once more, and risk appetite could drain at the end of this week. The best outcome for stock market bulls would be decent jobs growth with a moderate increase in wages for July.

The Bank of England’s hawks could boost GBP  

In the FX space, the pound will be in focus as we wait for the BOE meeting on Thursday. GBP/USD is pulling back from Friday’s high as we start a new week, after reaching $1.3980. The failure to achieve a weekly close above $1.40 is significant in our view, as it suggests that the market is primed for dollar strength, potentially on the back of a shift in sentiment from the Federal Reserve at this month’s Jackson Hole conference. However, there could be a short window of GBP strength in the coming weeks. This week’s BOE meeting could see upward pressure build on GBP if the market detects a hawkish shift at the bank. The BOE recently lost its hawkish chief economist, but will rising inflation and a strong economic bounce be enough to turn other members towards Haldane’s way of thinking? Two members, Michael Saunders and Dave Ramsden, have both expressed the need for tighter monetary policy in recent weeks. At this stage the market is expecting a 6-2 split in favour of continuing asset purchases at their current rate, however, that could change if there is a surprise dissenter, adding to the hawks at the BOE. In the doves’ favour is the spread of the Covid variant in the UK and the threat that a further surge in September, once people are back from holidays, could have on the economic recovery.  This could keep BOE Governor Andrew Bailey at co. on the cautious side later this week. From an FX perspective, we would expect GBP/USD to smash through $1.40 if we get a 5-3 split at the BOE on Thursday. However, if the bank decides to hold steady and the vote split is 6-2, as expected, then EUR/GBP could be the pair to watch, even if it has been a yawn-fest in recent months. It may see some further upside for the euro as the market prices out some of the BOE’s hawkishness. A break above 0.8560 is significant for this pair and opens the way to further upside towards 0.8660 – the July high.