Starting from tomorrow, Bangladesh goes to severe lockdown - a music we heard before. That adds to the earlier news of lockdown in Sydney, UK being ousted from the safe travel lists after the cases hit the highest levels since January. The delta variant is now traveling the world in a worrisome speed, hampering the prospects of economic recovery, yet again.
Though the European and the US stock investors don’t let the news overwhelm their trading decisions and they keep advancing… to the north. Is it because the rising Covid cases fan the Fed, ECB and BoE doves, in that, even the rising inflation shouldn’t allow them to tighten their ultra-supportive monetary policy, or because we rely heavily on the vaccination campaigns which would make another wave less disquieting than the couple of ones we saw earlier, or is it because the pandemic months proved rather successful for many, especially big cap stocks, but we well saw the S&P500 and Nasdaq refreshing record yesterday. Energy stocks didn’t do well with the discouraging Covid news, of course, but the tech stocks advanced.
Looking at the economic data, the house prices in the US jumped by most since 1988 on a sweet combination of low mortgage rates, solid pandemic savings, improved household income, and improved jobs. But could it last?
Now let’s paint the big picture. We were just making our way out of this terrible pandemic, the economies were recovering partly thanks to the reopening of businesses but mostly thanks to solid central bank and government support. But the side effect of the whole stimulus thing has been an important surge in inflation levels, which should have been temporary. Then policymakers started warning that the rising consumer prices could be less temporary, but they will stay as accommodative as possible until they see a substantial progress in economic recovery and on the jobs front. And now the Covid situation may get ugly, again, but we have super low rates, extreme accommodative monetary policies, a fragile jobs market and no big margin left for relaxing the financial conditions.
Generally, ADP data acts as a practice release before Friday’s jobs data. In theory, there is not much correlation between the two prints, but the ADP (NASDAQ:ADP) read still puts investors in the jobs data mood. The expectation is that the US economy added some 555K new private jobs in June, but the predictions should be taken with a pinch of salt, as last month, the expectation was some 650K job additions and we ended up with a number close to a million. Today, we need a strong number to keep the mood upbeat among investors. Any softness in jobs figures, on the other hand, could hardly get the Fed more accommodative with inflation hovering around the 5%, and with potentially an increased period of supply shortages and slow logistics.
Therefore, the jobs figure for June in the US better be good. Otherwise, we shall see some selloff starting from today, following the ADP figure.
And oil, a major responsible for the skyrocketing inflation, eased to $72 per barrel on Tuesday, as rising Covid cases fanned the worries that the recovery in oil demand may not be as strong and lasting as we first thought in the coming months. Though, the immediate oil demand remains strong and immediate supply remains restrictive amid OPEC supply cuts. Therefore, the latest rise in Covid cases may not encourage OPEC+ producers to back down from their projected decision to relax the production-cut regime at this week’s meeting. If that’s the case, we could the price of a barrel ease to the $70 mark in the coming days. If, however, OPEC+ makes a tactical change to its waning strategy and decides to keep its supply-cut regime unchanged, we could see the price of a barrel re-test the $75 resistance, with however a limited potential for further gains, as such decision would also send a discouraging message to the market. The one that no one wants to hear, the one giving some more weight to another heavy hit to the global economy, the one that would throw us back to the pandemic mood.