While nothing says summer like a roller coaster ride, we think the equity markets will turn very flat for the next few months. Still, today's NFP could possibly lend direction to the US dollar for the next 4 to 8 weeks as we enter summertime blues, although we also think volatility will be muted in FX land.
The Harker -Jefferson harmony should be good news for the market as it reduces implied volatility around the NFP and the subsequent June FOMC meeting date with Fed policy implied futures shifting for 72% to 32 % rate hike probability.
That's not to say the grandaddy of economic data, NFP, will be a riskless cakewalk in the park event, as the deltas will be what counts. Any blockbuster plus 300 print could encourage FOMC centrists to favour a hike, whereas a sub-150 reading would certainly play nicely to the 'skip' crowd within the FOMC.
But most US economists do not think the data will likely be soft enough to damage global growth expectations, which certainly won't help the USD versus the high beta EM.
Indeed, a softer NFP report would be interpreted as USD unfavourable against both G10 and liquid EM FX currencies as traders will again begin to price in peak rates and peak US dollar.
Gold could do well on a softer print given its higher beta than all the major currencies off US short and long-term rates and is the best buy on weak US data.
Outside of the widely expected inventory draws in Q2 and possible OPEC interventions next week, we think the fundamental signals are becoming more favourable for oil markets as we are unlikely to see a global recession soon.
While manufacturing historically dominates the business cycle, and its weakness would typically be associated with an encroaching recession, the opposite read is probably more credible, namely that services are so so strong that a widespread recession is less likely, especially since manufacturing may have limited downside from these already weak levels. And given the services account for 70% of global oil demand and with more room to grow, so do oil prices.
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