NFP in focus: There is silver lining in every cloud

Another day another record. The S&P500 hit a fresh high as the cyclical stocks and industrials led yesterday’s gains, while technology stocks paused and took a breath. We saw some profit taking in Google, Amazon and Facebook, but Apple and Netflix eked out gains, and Netflix even hit a fresh record as it traded close to $600 per share for the first time. 

Energy stocks did well: BP gained close to 2% in London, while Exxon rallied near 2.50% as US crude made an attempt above the $70bp with Hurricane Ida weighing on US oil supply. According to the latest news, Exxon is now tapping US strategic oil reserve, getting 1.5 million barrels per day from the DOE supplies to meet immediate demand as most production in Gulf of Mexico remains halted. In the short run, the Ida-triggered tragedy should continue pressuring oil prices higher, but the hurricane-led gains will likely remain short-lived and won’t sustainably reverse the course of oil prices, which were, until yesterday on a downtrending channel. Therefore, I still believe that for longer term players, price rallies could be interesting top-selling for a retreat toward levels as low as $63/65pb, which is where the 200-dma is headed for the next weeks. 

Is yesterday’s trading reflation backed? No, it is not. Even though we saw cyclicals outperforming the tech stocks, we’ve just seen the opposite the day before. Therefore, it’s too early to call for a significant rotation from growth to value, as the 10-year yield is still below the 1.30% mark.  

Of course, the major risk to the equity rally is the Fed tapering. And today’s US jobs data could shake the Fed expectations to the hawkish or to the dovish side depending on the strength of the data, of course.  

Wednesday’s ADP report was a big miss, as the report revealed that the US economy added only 374K private jobs in August versus more than 600K expected. But as there is no significant correlation between the ADP and the NFP reads on monthly basis, we can’t rule out the possibility of seeing a strong NFP print today.  

The consensus on Bloomberg survey is 750000 new nonfarm jobs added in August, though we could see a number well above or well below the consensus. A significant deviation from the consensus could tint the Fed expectations before the weekly closing bell.  

A strong figure, close to a million for the second straight month, would boost the idea that the Fed could start tapering its bond purchases as soon as November. While a soft figure, ideally below 500K, could revive the Fed doves and push the expectations of Fed tapering to the end of this year, or the beginning of the next.  

In both cases, we shall see equities claiming new records. Good jobs data is a sign of strong economic recovery and that’s good news for businesses and company earnings. While bad news is a reason for the Fed to maintain a soft policy stance for longer, which is even better as cheap liquidity does a better job in pushing equities higher than strong fundamentals. 

Therefore, in both cases, there will be a silver lining.  

But be careful to thin trading volumes as today’s jobs data is out at a time when New York is dealing with severe floods and Monday is closed for the US Labor Day. Thin trading volumes could lead to sharp price moves across equities if there is any positive or negative surprise on the data front. 

Gold, on the other hand, steadies a touch above the $1800 per ounce, as traders have their heart bouncing between low US yields that make holding the non-interest-bearing gold relatively interesting, and the strong momentum in equities, which makes the yellow metal uninteresting. I believe we don’t have much upside potential in gold unless there is a decent selloff across the equity space.