Summary and Price Action Rundown
Global risk assets are advancing this morning ahead of US nonfarm payroll figures for June despite continued acceleration of US coronavirus infections. S&P 500 futures indicate a 0.7% higher open after the index gained another 0.5% yesterday, extending its three-day rally to 3.6% and paring its year-to-date downside to an equal 3.6%. The tech-heavy Nasdaq registered a fresh record high yesterday. Equity market volatility had remained elevated over recent weeks as Covid-19 resurgences impede reopening efforts in various hotspots in the US and around the world, but this week’s rally has thus far proven impervious to worsening pandemic data. Equities in the EU and Asia also continued higher overnight. The dollar is little changed ahead of nonfarm payrolls while longer-dated Treasury yields are steady, with the 10-year yield at 0.68%. Brent crude prices are rising above $42 per barrel on bullish US inventory figures.
Nonfarm Payrolls Expected to Show Continued Improvement
Buoyant equity markets are reflecting optimism for continued improvement in this morning’s release of US jobs figures for June, though Treasuries and the dollar remain unmoved. Today’s nonfarm payrolls data for June is being released a day earlier than usual due to the observed 4th of July holiday tomorrow. After consensus estimates for May’s reading proved wildly inaccurate, economists are forecasting roughly 3 million new jobs last month, up from 2.5 million in May, as last month saw a further loosening of lockdown restrictions allowing more businesses to open. For context, May was expected to show another 7.5 million in layoffs after 20.7 million jobs lost in April and the dramatic upside surprise sent US equities and Treasury yields higher, though both the S&P 500 and 10-year Treasury yields are now trading below the levels they closed on that day. The unemployment rate is expected to decline to 12.5% from 13.3% in May, an improvement but still residing at a historic high. Downside risks in the data remain however, as some economists have noted that stimulus-related impacts, which may not be replicated in June, may have partly fueled May’s nonfarm payroll gain. Yesterday’s private business employment numbers from ADP pointed to more job gains, indicating that 2.4 million workers were hired last month, falling short of consensus projections of a 2.9 million gain and dipping from May’s 3.1 million new jobs but still showing brisk pace of labor market healing. Today’s release of initial jobless claims for the week ending June 27th and continuing claims for the prior week are, however, expected to show only moderate improvement.
Fed Communications Point to Continuation of Ultra-Accommodative Policy
FOMC meeting minutes for June downplayed the probability of yield curve control (YCC) as an impending policy step in favor of strong forward guidance on rates. The FOMC minutes from the June 9-10th meeting were released yesterday, with analysts focused on indications that the Fed is strongly considering implementing forward guidance in the near term to augment asset purchases, but is cool to YCC as it weighs policy options to navigate the remainder of the coronavirus-induced recession. FOMC members generally indicated support for outcome-based forward guidance with variations tied to inflation, employment, or calendar-based guidance. Many participants remarked that so long as the Committee’s forward guidance remained credible on its own, it was not clear that there would be a need to reinforce forward guidance with the adoption of a YCC policy. Thus, the general consensus was that Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency MBS as more information about the trajectory of the economy becomes available. Additionally, FOMC members regarded sustained support from fiscal policy as important as highly accommodative monetary policy to facilitate a durable recovery, pointing to uneven improvements in consumer demand, a dearth of public infrastructure projects due to strained state and local government budget conditions, or the decline in energy prices as factors likely to depress business spending.
Dismal US Covid-19 Data Tempered by Vaccine News – Yesterday, new US cases posted a new daily record over 50,000 with continued acceleration in hotspots like Florida, Texas, California, and Arizona. Worsening US pandemic data and news of reversed or paused reopening efforts, which continued yesterday with McDonalds and Apple announcing more closures, had recently weighed broadly on investor sentiment. However, optimism over prospects for a vaccine buoyed US equities yesterday after Pfizer and Oxford detailed progress in human trials.
Oil Prices Holding Gains – International benchmark Brent crude and US benchmark WTI remain near recent highs amid supportive US inventory data yesterday, which showed the largest drawdown this year. Earlier, oil prices had received a boost from an OPEC report showing improved compliance by cartel members with ongoing production cut commitments, taking OPEC output to its lowest level since May 1991 last month.