Investor view the NFP through an optimistic lens

Markets

Investor sentiment in Asia is poised to start the week on a positive note, drawing strength from last week's upward trajectory in global stocks, calmer currency markets, and declining global yields across the curve. This sets the stage for a potentially favourable day for Asian stocks.

After experiencing losses in April, equities staged a rebound in the latter part of last week. This was supported by positive earnings reports, particularly from Apple, along with a Federal Reserve that struck a less hawkish tone than initially expected.

Additionally, a softer US jobs report provided further impetus, with the S&P 500 registering its best performance since February 22nd on Friday. The report revealed a modest increase of 175k jobs in April and a slight uptick in the jobless rate to 3.9%. Of note, wage growth decelerated more than anticipated, with the yearly change in average hourly earnings cooling to 3.9% - its slowest pace in almost three years. This alleviated much of the inflation concerns that had dominated earlier in the week.

Although a notable decrease in headline Nonfarm Payrolls (NFP) figures can sometimes foreshadow economic difficulties, the recent decline wasn't catastrophic by any stretch. With few screaming recession in crowded theaters, stock and bond traders were left to interpret the data through an optimistic lens propelling indices higher and yields lower. The softer wage growth and a slight increase in unemployment may ease some of the Federal Reserve's concerns about implementing rate cuts this summer. The unexpected weakness across the key labour series is a much-needed friendly surprise for policymakers.

It's a relatively quiet week on the US data front, so we may need to wait until next week's US inflation data to determine if the unsettling inflation trends from the first quarter were indeed misleading before investors can fully turn the corner and put the 2024 inflation concerns behind them.

During this year’s second half, the Federal Reserve will lean towards rate cuts if the data supports such a move. Their aim seems to be avoiding a recession if possible. However, once economic momentum starts to shift, the economy can deteriorate rapidly so the Fed may be forced to cut rather than implement “ insurance cuts”.

While the resilience in hard economic data is notable, prolonged deterioration in survey-based prints often precedes weakness in "hard" data over time, suggesting that caution may be warranted despite the current resilience.

In essence, the accumulating signs of labour market rebalancing, and the softening of consumer and business surveys, signal a forthcoming slowdown in consumer and business spending growth in the coming months.

This slowdown could hinder businesses' ability to sustain the pace of price increases witnessed earlier this year, thereby putting pressure on their profits. This scenario may not bode well for stocks, especially if U.S. job numbers continue to decline, given that consumers have been pivotal in driving stronger U.S. earnings.

While the direct link to consumer inflation is not immediate or definitive, considering the potential for additional global supply chain disruptions and energy shocks, nonetheless the promising rebalancing trends in recent data still suggest a possible near-term path for the Fed to cut interest rate this summer

Forex markets

The recent easing in Treasury yields has tempered the strength of the dollar.

Following two interventions by the Bank of Japan last week to support the yen, which had weakened to a 34-year low at 160 per dollar, and a weaker-than-expected Non-Farm Payrolls report, USDJPY retreated to three-week lows to 152 on Friday.

While the standoff between Hedge Funds and Japanese authorities on the spot market persists, tensions have eased off after USDJPY bounced back to 153 when Japan's Finance Minister Suzuki hinted on Friday at potential measures to address excessive FX moves, which took much of the juice out of the long USDJPY squeeze as traders would interpret this a “ fait accompli” signal from the Ministry of Finance

Regarding USDJPY trading,  I suspect traders will move in day trading mode, especially after Finance Minister Suzuki's comments took some of the heat out of the long USDJPY squeeze. We might be entering a broader consolidation phase, with levels between 152 and 155 indicating that intervention was more successful than expected. However, we could also revert to the TONA vs SOFR differential dynamic, potentially driving USDJPY higher. Essentially, we are entering a phase of price discovery rather than directional certainty this week, especially in the absence of top-tier US economic data

The extent to which the NPF headline miss might fuel concerns about a recession, for the time being, 175,000 represents a fundamentally robust pace of hiring. Any significant downward revisions next month alongside another substantial miss may warrant cause for concern.

Overall, post-NFP, I’m more convinced we are in the later innings of this cycle of dollar strength and may look to add to dollar shorts on any dollar strength more so versus the Euro but key downside breaks on USDJPY could be a key dollar trend signpost. 

Oil markets

Last week saw a decline in oil prices, driven by a perceived reduction in immediate geopolitical risks and indications of a demand slowdown in the US. The geopolitical tension that had previously bolstered crude prices diminished, coinciding with macroeconomic data signalling a slowdown in the US economy during April, which dampened fuel demand.

Losses in RBOB futures accelerated following an unexpected contraction in the US service sector reported by the Institute of Supply Management (ISM) on Friday. This, coupled with a weaker US dollar resulting from an unexpected rise in the national unemployment rate and lower-than-expected job growth of 175,000, intensified pressure on gasoline futures. Earlier in the week, souring consumer confidence, as reported by The Conference Board, also contributed to downward pressure on the gasoline contract after \consumers expressed intentions to reduce discretionary spending, including on dining out and vacations.

Stagnation in industrial production and the knock-on effect it has on freight hauling has thwarted consumption and marked a more pronounced bearish skew in diesel markets which has also fed into the Brent and WTI benchmarks.