US Futures Steady Ahead Of US Jobs Data

US equity futures trade flat, recovering from an earlier loss as big as 0.6% and set for a 2% gain on the week, as investors awaited the June payrolls data (full preview here) to gauge whether the world’s largest economy will avoid a recession. At the same time, the yen and dollar both found haven demand with newsflow dominated by the assassination of former Japan prime minister Shinzo Abe.

Contracts on the S&P 500 dipped 0.1% to just above 3,900, signaling US stocks would likely retain weekly gains absent a payrolls shock report. Treasuries rose, with the 10-year yield dropping 1 basis point to 2.97%. The Bloomberg Commodity Index headed for the longest streak of weekly losses since March 2020.

Shockwaves spread across the world and global markets as Japan’s former Prime Minister Shinzo Abe was assassinated. Asian stocks pared an increase and the yen, a haven asset, strengthened. Before the shooting, the possibility of 1.5 trillion yuan ($220 billion) of stimulus in China, mostly for infrastructure, had aided sentiment.

In the US, Twitter shares fell 4% in premarket trading on Friday after a report said that Elon Musk’s $44 billion proposed takeover of the social media company was in “serious jeopardy. Here are some other notable premarket movers:

GameStop (GME US) shares fell 6.8% in US premarket trading after the video-game retailer fired its CFO Mike Recupero and announced that it was cutting jobs.
Upstart (UPST US) shares drop 17% in US premarket trading after the consumer- finance company reported preliminary revenue for the second quarter that missed prior guidance.
Levi Strauss (LEVI US) shares rose 4.6% in US after-hours trading on Thursday. Analysts are positive on the casual clothing maker’s earnings beating estimates, saying it highlights the strength of its brand and a positive performance in a difficult environment for retailers.
Six Flags (SIX US) drops 2% in US premarket trading. It has been cut to neutral and price targets lowered for Cedar Fair and SeaWorld at Citi, citing signs of weakness across the industry “with the month of June particularly problematic.”

“With the recession talk taking center stage, investors are increasingly focused on the jobs figures,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note. “A strong read could bring forward the idea that the US economy could soft-land despite tighter Fed policy, or that the Fed would allow itself to get more aggressive to fight inflation.” 

And speaking of jobs, the June US nonfarm payrolls growth is expected to print 268k vs 390k in May with the whisper number lower around 245k. In previewing Friday’s nonfarm payrolls report, Goldman trader Matthew Fleury wrote that “the market wants not too hot not too cold to keep this bid. Strong enough to say the world isn’t going into recession. Not too strong to send US10s back to 3.25% on the day. Not too cold to highlight US data deteriorating while inflation will stay high and fed hiking 75bps into dramatic slowdown. Something like 175k to 250k.”

Global markets are increasingly positioned for the possibility of a US recession as the Federal Reserve delivers successive rate hikes to tame elevated inflation. On Thursday, two of the Fed’s most hawkish policy makers backed raising interest rates another 75 basis points this month, while playing down recession fears. Governor Christopher Waller and James Bullard, president of the St. Louis Fed, both stressed the need to get policy into restrictive territory to confront the hottest price pressures in 40 years, even if this meant slowing growth. Both are voting members of the Federal Open Market Committee this year. Meanwhile, investors suspended their judgment on the question, keeping key portions of the US yield curve – such as the 2s10s – inverted and awaiting Friday’s nonfarm payrolls report.

In Europe, the Stoxx 600 Index erased a loss as carmakers rallied, as investor attention turned to the second-quarter earnings season from worries around a potential recession. Stoxx Europe 600 Index up 0.6%, autos and construction sectors lead gains. Miners, banks and consumer discretionary stocks were the weakest within the Stoxx 600

Earlier in the session, Asia Pacific shares climbed as speculation about stimulus in China and commentary from Federal Reserve officials soothed investor concerns about a slowdown in global growth. The MSCI Asia Pacific Index added as much as 1.1%, led higher by tech and material shares, amid reports that China could allow 1.5 trillion yuan of bond sales by local governments.  Tech-heavy markets such as South Korea and Taiwan led the region’s advance, while Japan shares trimmed their advance after reports that former Prime Minister Shinzo Abe was shot during a campaign event. Abe later died, NHK reported.

The MSCI Asia gauge is poised for a weekly gain of about 1.3% as chip shares rebounded, helped by better-than-expected sales at Samsung Electronics. Still, the Asia tech gauge’s advance has lagged the Nasdaq 100’s climb this week as worries remain about the region’s growth outlook.  “A lot of it is simply sentiment driven — the market is still on edge with arguments on both sides for a hard or soft landing,” said Justin Tang, head of Asian research at United First Partners. “The Chinese stimulus is interesting from a timing perspective given the fast tracking of the sales from the next year’s quota, indicating pro-activity from the central government,” he added

India’s benchmark equities index posted its best weekly advance since April as a decline in commodity prices eased concerns of higher inflation and tighter monetary policy measures.  The S&P BSE Sensex climbed 0.6% to 54,481.84 in Mumbai, taking its weekly advance to nearly 3%. The NSE Nifty 50 Index advanced 0.5% on Friday. Most markets in Asia climbed amid China’s stimulus measures to support infrastructure and shore up the economy.   Top private sector lender ICICI Bank Ltd., which climbed to its highest level since April 21, offered the biggest boost to the Sensex. The index saw 21 of its 30 member stocks trading higher. Fifteen of 19 sectoral indexes compiled by BSE Ltd. gained, led by a gauge of capital goods companies.  The price of Brent crude, a major import item for India, has declined more than 14% since the end of May to trade near $105 a barrel on Friday. Lower oil prices will help reduce the import bill, support the local currency and keep consumer price inflation tethered.

Australia’s S&P/ASX 200 index posted a weekly gain of 2.1%, the most since mid-March, lifted by some easing of recession fears.   The benchmark rose 0.5% Friday to close the week at 6,678, with mining and energy stocks leading advances. The materials subgauge rose as much as 2.9% before paring some gains as iron-ore futures cooled, with the possibility of major stimulus in China having provided a brief lift to sentiment. In New Zealand, the S&P/NZX 50 index rose 0.5% to 11,169.24.

In FX, the Bloomberg Dollar Spot Index swung from a loss and the yen rose versus its Group-of-10 peers after the news that former Japanese Prime Minister Shinzo Abe was assassinated in the western city of Nara during campaigning for Sunday’s national election. The yen climbed as much as 0.5% against the dollar. Treasuries also gained after the news. The Australian dollar fell and bonds pared declines the news of the shooting.

Treasuries rose on Friday, with the two- and 10-year yield curve remaining inverted for a fourth day. Slowdown fears dogged Europe too, where the closely watched yield spread between Italy and Germany narrowed 4 basis points, even as the region’s central bank was expected to begin monetary tightening. Bunds  outperform Treasuries as gilts lag: front-end yields lead, with 2-year richer by ~1.9bp on the day, steepening 2s10s spread slightly; 10-year around 2.98% with bunds trading ~4bp richer in the sector and gilts lagging by ~3bp.  Bunds bull steepened, paring some of Thursday’s bear flattening move ahead of scheduled comments by ECB speakers including President Lagarde, as well as US jobs numbers which are expected to slow.

Bitcoin fell but held above $21,000 apiece.

In commodities, WTI traded within Thursday’s range, falling 0.2% to trade near $102.57. Brent rises 0.2% above $105. Most base metals trade in the red; LME tin falls 3.4%, underperforming peers. Spot gold falls roughly $3 to trade near $1,737/oz

Looking to the day ahead now, and the main highlight will be the US jobs report for June. Otherwise, data releases include Italian industrial production for May. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Muller and Villeroy, and the Fed’s Williams.

Market Snapshot

S&P 500 futures down 0.4% to 3,888.50
STOXX Europe 600 down 0.3% to 413.92
MXAP up 0.4% to 158.62
MXAPJ up 0.4% to 524.45
Nikkei up 0.1% to 26,517.19
Topix up 0.3% to 1,887.43
Hang Seng Index up 0.4% to 21,725.78
Shanghai Composite down 0.2% to 3,356.08
Sensex up 0.4% to 54,375.89
Australia S&P/ASX 200 up 0.5% to 6,678.01
Kospi up 0.7% to 2,350.61
Gold spot down 0.0% to $1,739.85
U.S. Dollar Index up 0.36% to 107.52
German 10Y yield little changed at 1.28%
Euro down 0.5% to $1.0109
Brent Futures down 0.2% to $104.40/bbl

Top Overnight News from Bloomberg

The shooting of former Japanese Prime Minister Shinzo Abe is spurring market debate over a potential loss of support for the Bank of Japan’s super-easy monetary policy after an initial rush to haven assets Friday.
Britain’s labor market grew at the slowest pace in 16 months, suggesting the rapid hiring spree following the pandemic is starting to give way to more normal trends, a survey showed
A weakening Swedish currency is piling pressure on the Riksbank to do more to tamp down on inflation, only a week after it hiked its main interest rate by the most in two decades
Denmark’s central bank expects the country to return to lower interest rates once the current push toward rate hikes has passed, Governor Lars Rohde said in an interview with newspaper Borsen
The ECB’s first major climate stress test shows banks facing a hit of 70 billion euros ($71 billion) if the transition to a lower-carbon economy is disorderly
The German parliament has passed a set of legislation to secure the country’s energy supply as Moscow reduces gas flows to Europe
Global food prices dropped from near a record amid prospects for fresh supplies and fears about a recession, potentially offering some respite to strained households
China’s Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year, an unprecedented acceleration of infrastructure funding aimed at shoring up the country’s beleaguered economy

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were higher across the board as the region took impetus from Wall St’s fourth consecutive win streak, but with gains capped heading into the NFP jobs data. ASX 200 was led higher by the energy sector and amid hopes of thawing Australia–China relations. Nikkei 225 traded positive but pared a majority of its gains following the shooting of former PM Abe. Hang Seng and Shanghai Comp. kept afloat amid stimulus hopes with China reportedly considering USD 220bln of stimulus although gains were capped in the mainland amid weakness in the property sector and after Chinese Premier Li noted China’s economy is recovering but the foundation was not yet solid.

Top Asian News

China’s military said it is conducting a military exercise around Taiwan and US support for Taiwan ‘separatist forces’ is futile which will only disturb the peace in the Taiwan Strait, according to state media.
China Defence Ministry said China firmly opposes the visit by a US senator to Taiwan which severely damages the relationship of the two countries and two militaries, while it added that the drill near Taiwan is directed at US and Taiwan provocation, according to Reuters.
Former Japanese PM Abe has died following the earlier shooting during a speech in Nara, via NHK.
After 18 Years, Thailand Post to Raise Prices as Inflation Bites
World Leaders React to Shooting of Japan’s Ex Leader Shinzo Abe
TikTok Owner Loses Musical.ly Co-Founder After Edtech Flop

European bourses have been choppy throughout the session, moving between modest gains and losses despite a lack of fresh fundamental drivers; Euro Stoxx 50 -0.1%. US futures have been steadier, consistently posting modest losses, ES -0.3%, going into the BLS release. Sectoral performance is mixed, with Energy modestly outperforming while the likes of Basic Resources lag amid base metal pricing in wake of renewed USD strength. China’s CPCA says 1.97mln passenger cars were sold in June (prev. 1.37mln in May); Tesla (TSLA) sold 78,906 China-made vehicles in June (prev. 32,165 in May), via Reuters. Acer (2553 TW) June sales +3.1% YY; H1 -0.4% YY. Q2 prelim. revenue TWD 72.35bln, -9.3% YY.

Top European News

Citi Strategists Add AB InBev, Bayer, Compass to Focus List
Polish Industry Is Seeking Compensation in Case of Gas Rationing
Blatter, Platini Acquitted by Swiss Criminal Court, AFP Reports
Crops Climb as Traders Eye Output Prospects Amid Tight Reserves

FX

DXY breaches final 2002 hurdle on the way through 107.500 ahead of NFP with upward impetus from weakness in several index components and other Dollar counterparts, index to reaches 107.790 before waning.
Yen bucks broad trend following fatal shooting of ex-Japanese PM Abe at pre-election campaign event, USD/JPY capped around 136.00.
Sterling slides after short-lived reprieve from political upheaval, Cable holds in low 1.1900 area after 1.2050+ pop.
Euro extends declines before finding some technical props; EUR/USD back on 1.0100 handle vs 1.0072 low in line with a key Fib retracement level.
Loonie loses recovery momentum in the run up to Canadian LFS and US BLS showdown, USD/CAD around 1.3000 within 1.3025-1.2953 range.
Aussie and Kiwi unable to resist latest Greenback advances, but underpinned by partial rebound in some commodities; AUD/USD tests support into 0.6800 from circa 0.6861 peak, NZD/USD hovers around 0.6150 from high just shy of 0.6200.
Lira laments latest CBRT survey showing further rise in end 2020 Turkish CPI and USD/TRY forecasts, latter now up to 18.9881 vs current 17.3200 spot price.

Fixed Income

Bonds relatively becalmed awaiting US and Canadian employment data double-header.
Bunds, Gilts and T-note all rangy between 151.17-150.42, 115.63-12 and 118-20/08 parameters.
UK debt lagging sub-par in the hiatus before a new Tory leader and PM is appointed and this also weighing on the underperforming Sonia strip.
Italian Economy Minister Franco says he is confident that market conditions will stabilize and domestic bond yields will fall to reflect fundamentals.

Central Banks

ECB says the top 41 banks would suffer credit and market losses of at least EUR 70bln from higher carbon prices, floods and droughts; just 20% consider climate risk as a variable when granting loans.
ECB’s Visco says a hike larger than 25bps could be appropriate in September if medium-term inflation expectations do not improve. IT/GE 10yr spread peak of 250bps in early June was not consistent with economic fundamentals. Comments were essentially in-fitting with existing ECB guidance and his recent remarks.

Commodities

Fresh fundamentals have been somewhat limited and focused on familiar themes; however, commodities broadly are dented amid renewed and pronounced USD upside.
Crude posts losses of less than USD 1/bbl in comparison to the sizeable USD 16/bbl ranges seen this week.
Kuwait set August KEC crude OSP for Asia at Oman/Dubai + USD 7.15/bbl, according to Reuters.
UK’s CMA says there is cause for concerns in some parts of the road fuel market.
Spot gold is in-fitting, modestly softer but essentially unchanged on the session given the sizeable recent moves and near USD 100/oz weekly parameters.

US Event Calendar

08:30: June Change in Nonfarm Payrolls, est. 268,000, prior 390,000
June Change in Manufact. Payrolls, est. 21,000, prior 18,000
June Change in Private Payrolls, est. 237,000, prior 333,000

June Unemployment Rate, est. 3.6%, prior 3.6%
June Labor Force Participation Rate, est. 62.4%, prior 62.3%

June Underemployment Rate, prior 7.1%
June Average Hourly Earnings YoY, est. 5.0%, prior 5.2%; MoM, est. 0.3%, prior 0.3%
June Average Weekly Hours, est. 34.6, prior 34.6

10:00: May Wholesale Trade Sales MoM, est. 1.0%, prior 0.7%
10:00: May Wholesale Inventories MoM, est. 2.0%, prior 2.0%
11:00: Fed’s Williams Speaks in Puerto Rico
15:00: May Consumer Credit, est. $30.9b, prior $38.1b

DB’s Jim Reid concludes the overnight wrap

I honestly feel exhausted after this week. Bonds and commodities have been swinging to both sides of the inflation / disinflation ledger in a pretty violent manner in such a short space of time. To recover I’ve managed to secure two early rounds of golf this weekend with the quid pro quo that I have all Saturday afternoon and evening to look after the kids while my wife goes to see Pearl Jam in Hyde Park! I’m slightly jealous as the album “Ten” was strangely my revision album of choice during my university exams. I was addicted. That might explain the odd way I look at economics!

Economics is one category you can vote for me in the global II fixed income poll that started this week. All of us at DB would appreciate your support if you value our research. Click here (pdf) to see all the categories I would appreciate your support in. Feel free to let me know if you voted so I can feel better about myself!

So in an exhausting week, and in spite of a march of bad news, the S&P 500 (+1.50% overnight) has for now successfully climbed a July wall of worry to be up every day so far with the first four consecutive day increase since late March. Payrolls awaits us today and given that we think it will be tough to call a proper recession until employment cracks, these are important events.

That’s not the only one coming up with US CPI next Wednesday and then the “wait and see to what happens next” after the scheduled Nord Stream gas pipeline closure (July 11-21) ends. When it comes to recession risk, Tim and Henry on my team have just launched a new weekly “Recession Watch” product (link here). It’s a brief 2-pager, and they’ll be publishing it each Thursday following the US claims data that our economists have shown to be one of the best leading indicators for growth. Yesterday’s numbers came in worse than expected however, with the weekly initial jobless claims at 235k in the week through July 2 (vs. 230k expected), which is their highest level since January, whilst continuing claims for the week through June 25 also rose to a 9-week high of 1.375m (vs 1.328m expected) which brings the 4 week moving average +2.2% above its lows over the last year. Remember that in the 60 years of this data, every time we’ve had an +11.5% rise in the 4 week moving average from the lows over the previous year we’ve generally had a recession start relatively quickly (average 2 months).

In terms of what to expect from payrolls, our US economists think that nonfarm payrolls will have grown by just +225k (consensus at +268k), which would be the slowest pace of monthly job growth in 18 months. However, they do think this will be enough to push the unemployment rate down to 3.5%, which is an important milestone as that was the pre-pandemic low in the unemployment rate back in February 2020.

Ahead of all that, markets were in a buoyant mood and as discussed at the top, the S&P 500 advanced +1.50% with an outperformance among more cyclical industries. Indeed, the NASDAQ gained +2.28% and the small-cap Russell 2000 was up +2.43%, so some strong increases in a number of areas. And in turn, investors grew more optimistic about the ability of central banks to keep hiking rates, with Fed funds futures taking the expected terminal rate up by +3.5bps as those growth fears abated somewhat. That enabled Treasury yields to rise across the curve, with those on the 10yr (+6.7bps) moving back above the 3% mark intraday but just dipping below by the close (2.9945%), even if the 2s10s curve remained in inversion territory (-2.6bps at the close) for a 3rd consecutive day. This morning yields are down -1.48bps to 2.979% as we go to press. Meanwhile, some of the more hawkish Fed officials, Governor Waller and President Bullard, re-iterated the tone expressed in the minutes the day prior. Namely, they support 75bp hikes in July and that the risks are for inflation expectations to explode asymmetrically higher. Both still sounded an optimistic tone about the chances of avoiding a hard landing recession, choosing to emphasise strong GDI and labour market numbers over GDP which has dragged due to large trade deficits.

It was much the same story in Europe yesterday as well, with the STOXX 600 climbing +1.88%, and yields on 10yr bunds (+11.1bps), OATs (+9.6bps) and BTPs (+15.3bps) all moving higher. That said, there was continued bad news on the energy side, with natural gas futures (+7.13%) advancing for a 7th day running to close at €183 per megawatt-hour. That comes just days ahead of the scheduled closure of the Nord Stream pipeline, and yesterday saw German economy minister Habeck appeal to Canada’s government to release a turbine for Nord Stream that’s been affected by sanctions, amidst fears that Russia could use the missing turbine as a reason to stop the flow of gas. Reports from Reuters overnight suggest that Ukraine opposes Germany’s plea for Canada to hand Russia a turbine that would enable the latter to send gas supplies back to Germany, with Ukraine citing such a manuevre as a circumvention of sanctions.

On a related theme, one-month forward German electricity prices also continued to run higher, increasing +7.28% and are threatening €400 for the first time since Russia’s invasion, having closed at €398. Against that backdrop, the euro weakened a further -0.22% against the US Dollar, closing at its lowest level since 2002 once again.

On the topic of commodities, yesterday saw something of a bounceback after consistent recent losses across the board. Brent crude oil prices rebounded by +3.93%, closing at $104.65/bbl, which is some way from the levels beneath $100/bbl where they were trading a little more than 24 hours previously. Similarly, copper (+4.80%) recovered from a 19-month low, whilst gold (+0.07%) advanced from a 9-month low.

Here in the UK, we had another day of dramatic political developments as Prime Minister Johnson finally announced his resignation following a raft of ministerial departures. Whilst it had looked as though Johnson would try to ride the situation out 24 hours ago, not long after we went to press, his newly appointed chancellor Nadhim Zahawi (who’s only been in the job since Tuesday night) publicly called for him to go, and shortly after that the news leaked through that Johnson planned to resign. In his statement outside 10 Downing Street, Johnson said that he would remain PM until a successor is chosen, but there have been calls from a number of MPs and even former Conservative PM John Major for him to be removed from office immediately, so there are doubts as to how long he’ll remain be in place. Meanwhile, the opposition Labour Party said that if Johnson didn’t step down straight away, they’d hold a vote of no confidence in Parliament.

Asian equity markets are higher in early trading tracking overnight gains on Wall Street. Adding to the positive sentiment is the story from yesterday of the possibility that the Chinese government will give a huge stimulus shot to the struggling economy by allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in 2H as support for infrastructure funding. This morning the Kospi (+0.91%) is leading gains across the region with the Hang Seng (+0.39%), Shanghai Composite (+0.18%) and CSI (+0.19%) all trading in positive territory. Elsewhere, the Nikkei (+0.51%) gave up its initial bigger gains after former Japanese Prime Minister Shinzo Abe was taken to hospital after being shot (more below). Outside of Asia, US equity futures point to a negative start with contracts on the S&P 500 (-0.38%) and NASDAQ 100 (-0.46%) falling after a good run so far this month.

Early morning data showed that Japan’s household spending surprisingly slipped -0.5% y/y in May (v/s +2.1% expected), declining for the third straight month and compared to the previous month’s -1.7% drop. Separately, Japan’s current account surplus narrowed to ¥128.4 billion in May (v/s ¥172.0 billion expected) on ballooning imports and against a surplus of ¥501.1 billion in April. In addition to higher energy costs, the yen’s sharp depreciation against the US dollar also caused import prices to rise in the nation. Looking ahead, China’s June inflation data which are due to be released over the weekend will be closely watched.

In a very shocking event, Japan’s longest serving PM Shinzo Abe was shot while giving a stump speech in the city of Nara (Southern Japan) for the parliamentary elections for the upper house scheduled on Sunday. Media reports are not immediately clear on how serious Abe’s injuries are.

Before we look at the day ahead, on the data side, yesterday saw German industrial production grow by +0.2% in May (vs. +0.4% expected), although the previous month’s growth was revised up to +1.3% (vs. +0.7% previously).

To the day ahead now, and the main highlight will be the US jobs report for June. Otherwise, data releases include Italian industrial production for May. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Muller and Villeroy, and the Fed’s Williams.