Strong US jobs data revive Fed hawks

The US economy added 528’000 new nonfarm jobs in July, significantly higher than 250’000 expected by analysts. Last month’s data was revised up to 400’000. The unemployment rate fell to 3.5%, the lowest level since late 1960s. Wages grew 5.2% vs 4.9% expected by analysts. 

Strong US jobs data revived the Federal Reserve (Fed) hawks on Friday. The US 10-year yield jumped, and the US dollar gained. Gold gave back a part of gains, and was offered into to the $1800 mark, as the higher yields increased the opportunity cost of holding the non-interest-bearing gold.  

US stocks closed in the negative, although the three major US indices closed the first week of August in the positive. The S&P500 gained 0.4%, while Nasdaq jumped more than 2% last week, in the continuation of the July rally.  

It's all about the market rhetoric 

Stock don’t need good data, they need softer yields, as softer yields push their valuations higher.  

Since the beginning of July, the S&P500 recovered more than 10%, while Nasdaq bounced around 17% higher. This was partly due to the better-than-feared earnings reports, but mostly due to the easing US yields on the back of growing recession expectations. 

As such, the market rhetoric went from ‘the Fed is hiking interest rates to fight inflation and that’s bad for the stocks’, to ‘higher rates will push the US economy into recession and get the Fed to slowdown, and maybe to reverse its rate hiking policy’. This shift in expectations had a cooling effect on the US yields, and the softer yields pushed stock prices higher, as lower rates automatically push the stock valuations higher.  

Inflation is key

The S&P 500 is nearing an important technical level near 4180 level, the peak reached in June, before the index plunged again below the 3700 mark; we could see sellers come in play into the 4200 mark, and bring the index lower. 

But the sentiment will mostly depend on this week’s inflation data. If US inflation starts easing, the Fed could rethink about smaller rate hikes, which could give another positive swing to the stocks.  

Therefore, inflation data is, again, key. Analysts expect that the US inflation may have slowed to 8.7% in July from 9.1% printed a month earlier. It’s possible given that the oil prices eased around 15% last month.  

For now, the Fed is given around 70% chance to hike the rates by another 75bp in September. We will see how that evolves throughout the week. 

Is crude oil below $90 pb sustainable? 

The barrel of US crude kicks off the week slightly upbeat, below the $90 level. But the news that China started mass testing in the Hainan beach resort comes as a warning that China is still not done with its fight against Covid.  

Last week, OPEC increased the production outlook by a laughable, and a completely meaningless 100’000 barrels per day. That’s about 0.1% of the global oil output.  

But the recession fears and the slowing demand will likely continue driving the market; we could see a further downside pressure on oil prices.