Asian stock markets were down on Monday and the US dollar held its ground after the U.S. payroll report came in at 528K – more than double the 250K forecasts. The stunning figure pointed to no signs of US recession and reinforced expectations of additional substantial rate hikes from the Fed to contain the highest inflation in decades.
This cut off the recent global shares’ advance of three consecutive weeks rebounding from bear-market lows and caused US equity futures to fluctuate today, Monday. Sentiment was also hurt by Covid lockdowns in a Chinese resort island while Hong Kong cancelling mandatory quarantine had no positive impact.
At the same time, European stock markets traded higher riding on the back of generally positive corporate earnings despite closing lower on Friday after the release of higher-than-expected US NFP report. The strong report evaporated hopes of the Fed pivoting its aggressive monetary policy with sharp rate hikes which hit the world’s largest economy and greatest growth driver.
NFP out, CPI & UK GDP on Investors’ Radars
After the release of the higher-than-expected NFP report investors will be closely watching the July US consumer prices report slated to be released on Wednesday. Economists forecast that the annual rate of inflation will drop to 8.7% from June’s 9.1% – the highest increase in four decades. The release of the U.K. GDP for June will also be watched closely as the Bank of England warned that a prolonged recession is to be expected later in 2022.
Inverted US Bond Curve Points to Recession Expectations
The strong US employment data boosted Treasury yields and the US dollar as investors priced in a 70% chance the Federal Reserve will increase rates by 75 basis points in September. This sent two-year yields higher on Friday and further inverted the curve. A key part of the US bond curve remains close to the most inverted level in 22 years suggesting that investors expect an upcoming recession as the Fed continues to tighten its monetary policy.
US officials signal more rate hikes are to be expected with San Francisco Fed President Mary Daly saying that the Fed is “far from done yet” in its attempts to cool down price pressures. In the meantime, Governor Michelle Bowman said the US central bank should continue considering large rate increases close to last month’s 75 basis point hike until inflation significantly lowers.
Oil Moderately Moves Higher
Crude oil prices edged higher on Monday but stayed around levels of multiple-month lows as recession fears negatively affect the demand outlook. China, the world’s top crude importer seems to be on a slow recovery according to the latest data. Import levels per day in July have increased but remain 9.5% lower than a year ago.
At the same time, US and China relationships remain tense over Taiwan after US House speaker Nancy Pelosi visited the country. The Chinese military announced a new exercise close to the island.
What to Watch out for this Week:
Iran nuclear deal talks
US CPI data
Chicago Fed President’s speech
Minneapolis Fed President’s speech
US initial jobless claims
Euro-area industrial production
UK GDP for June
US University of Michigan consumer sentiment