Market Briefing - Markets Consolidate Ahead of Non-Farm Payrolls

Markets are battening down the hatches ahead of the June jobs report, due at 8:30 am. The dollar is up slightly as yields and commodity prices flatline, and equity futures are pointing a modestly-weaker open. 

Consensus estimates suggest non-farm payrolls rose by 250,000 from the prior month, with the unemployment rate holding steady at 3.6 percent. A positive report might reduce recession fears, but we should note that markets are again caught in the risk-on/risk-off dynamic that prevailed after the 2008 financial crisis. A stronger-than-anticipated print might increase the expected pace of Federal Reserve hikes, hurting risk appetite, while a weaker number might act like a red flag for the bulls.

Also at 8:30, Canada is expected to report 23,000 jobs added in June, with the unemployment rate flat at 5.1 percent. Implications for the Bank of Canada’s meeting next week are limited - a 75 basis point move is fully priced into markets - but higher-than-expected wage growth might support interest rates further out on the curve.

The yen is trading sideways after a gunman shot and killed former prime minister Shinzo Abe. The leader’s “Abenomics” reform programme - composed of monetary easing, government spending increases, steps to bring more women into the workforce, enhanced immigration, and other growth strategies - remade the Japanese economy in ways that are only beginning to make themselves felt. 

Some have suggested the removal of Abe’s influence could increase pressure on the Bank of Japan to change its policy framework, but we would consider this unlikely. Current Prime Minister Fumio Kishida has repeatedly emphasized his support for the Bank’s independence, and recent public comments suggest Governor Kuroda will keep yield suppression strategies in place until wage inflation accelerates and the economy shows more evidence of growth. 

The euro continues to weaken, dropping dangerously close to parity with the dollar in overnight trading. The European Central Bank is preparing to raise rates later this month, but with an energy shock crushing household demand and growth slowing, policy adjustments are widely expected to lag the Federal Reserve and most other major central banks. With the 1.0000 handle exerting a powerful gravitational pull on traders, a move through parity could quite possibly come during today's trading session, or early next week. 

The sterling-dollar rate looks headed for a one-percent drop on the week, with the bulk of its losses achieved before Boris Johnson’s resignation. The race to replace the prime minister at the head of the Conservative Party remains deeply unpredictable, but there is potential for a rebound in the pound as uncertainty is resolved. 

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