The week starts on mixed sentiment, as European and US futures are down, and the US dollar is up this morning.
A mixture of micro and macro events will set the tone for this week and onward, as the earnings season kicks off this week, and the latest US inflation figures will be released, as well.
First, reaction to jobs data was good
The US economy added 372,000 new nonfarm jobs, more than 100,000 penciled in by analysts. The unemployment rate was steady near the 3.6% level, which is a five-decade high. Moreover, the average earnings didn’t increase much, just around 5.1% year-on-year.
As a result, the strong jobs figures washed out a part of the recession fears and the limited increase in salaries contained inflation worries. The US indices went up and down again, the S&P 500 closed the session near flat on Friday, but all three major US indices were up for the week. The S&P 500 gained close to 2% last week, Nasdaq jumped more than 4.5%, while Dow Jones added a slim 0.8%. Over the week, oil stocks came under pressure, as oil prices fell all the way to $95 a barrel.
Investors needed that puff of fresh air and preferred cheering the fact that the jobs market remained resilient to the rate hikes, rather than worrying about the Federal Reserve (Fed), which could get more aggressive on its rate policy, convinced that the jobs market could take on more in the coming quarters.
But inflation will see the last word…
But of course, investor sentiment could rapidly turn around. This Wednesday’s inflation data, particularly, carries the risk of killing the post-jobs data joy.
Due Wednesday, the US inflation data is expected to print a further advance to 8.8% in June, from 8.6% printed a month earlier. If that’s the case, or if we see a bigger number, the Fed hawks will be out for hunt again. We will perhaps see a further rise in US yields, and that could force investors to give back a part of last week’s gains.
Activity on US Fed Funds hint at a 100% chance of seeing at least a 75bp hike at the next FOMC meeting, and started pricing in the possibility of a 100bp hike, which currently stands around 7%.
Oil under pressure
Oil bulls’ reluctance to extend gains above the 50-DMA, and the bears' motivation to sell the tops hint that oil prices may have gone far enough to warn that, near the $120 levels and above, the recession fear and the demand side worries take the upper hand.
This being said, the bearish market remains vulnerable to supply-side news. Therefore, I am cautiously neutral to negative on oil, and believe that in the absence of an unexpected supply shock, we could see the barrel of US crude retreat toward the $85 mark.
Earnings
Earnings season kicks off to give a concrete insight into how well the US companies deal with rising inflation and a stronger US dollar.
The S&P profit estimates have been pushing higher this year, despite a major dive in stock prices. Either the analysts are well behind the curve, and the earnings will come as confirmation that inflation and the strong US dollar are having an ugly impact on profits. Or they are right, the US company profits are resilient to economic shocks, as the jobs market is.
In the FX
The US dollar extends its steep rally. The EUR/USD almost hit parity last Friday, and is again under pressure this morning.
In Japan, the yen is also weakening as the ruling coalition in Japan extended a majority in last weekend’s upper house elections. The current government is up for more fiscal easing, while the Bank of Japan (BoJ) doesn’t seem in any hurry to tighten its purse’s strings.