US June jobs data beats expectations

• Following several months of lacklustre jobs reports which missed expectations, the NFP payroll released at the close of last week showed a net gain of 850,000 jobs in June, exceeding the consensus projection of 720,000. President Joe Biden celebrated the news, saying that ‘our economy is on the move and Covid-19 is on the run’, and the recovery is certainly strongly associated with the ongoing successes against the pandemic seen in the US, where 48% of the population is now fully vaccinated. These latest jobs figures would have benefitted from the lifting of the rule that masks must be worn in most settings which occurred on May 13. Indeed, service industries were the major driver of the net gain in jobs. Aside from the strong rise in headline jobs numbers, there was also a 0.3% m/m gain in average hourly earnings (slower than in May), and while the headline U-3 unemployment figure ticked up to 5.9% from 5.8% previously, this was taken as a broadly positive signal as it was drive by formerly discouraged workers returning to their job hunts. Markets took the data as a goldilocks moment, indicative of a strengthening economy but unlikely to prompt further rapid accelerations in price growth or sooner-than-signposted tightening by the Fed.
• The prospect of a new global tax regimen took a significant step forward over the weekend as 130 countries endorsed a two-tier system that would 1) set a minimum effective corporate tax rate of 15% for businesses earning over EUR 750mn, and 2) establish new jurisdiction rules for the world’s very largest companies (with revenues over EUR 20bn) which will see them pay taxes not only where they are physically based but where they do business. Many governments would have been eager to secure a potential boost to their pandemic-depleted coffers, but the deal was not without its holdouts, with Ireland and Hungary among the countries that were not swayed by the offer of carve-outs awarded to various countries and industries, worried that the new rules would make them less attractive as investment destinations.
• Having failed to reach agreement on a proposed boost to supply at their meeting at the close of last week, OPEC+ is set to continue discussions this week. Failure to reach agreement could see prices continue to push higher if the production curbs remain in place as they are, potentially exacerbating the global uptick in price growth that is challenging the recovery and central banks’ nerve, or else the deal could collapse altogether prompting a glut of oil returning to the market.
• Turkish central bank governor Sahap Kavcioglu reiterated his pledge to keep real interest rates positive and not to cut the benchmark one-week repo from its current 19.0% until there has been a slowdown in headline inflation. He expects that inflation (16.6% at the latest print) will slow through the third and fourth quarters.
• Saudi Arabia has announced that it is suspending travel to the UAE, Ethiopia and Vietnam due to concerns around new variants of Covid-19. This will be a blow for the Emirati tourism sector given that the kingdom is one of the top-three sources of visitors to the UAE in normal circumstances.

Today’s Economic Data and Events

• 11:00 Turkish CPI inflation y/y, June. Forecast: 16.8%.
• US markets are closed for the July 4 holiday.

Fixed Income

• A stronger than expected non-farm payrolls report for June failed to halt the rise in US Treasuries last week. The belly and longer-end of the curve rallied thanks to some pockets of softness in the June NFP with the implication that the Federal Reserve’s loose monetary stance will remain in place in the near term. Yields on 2yr USTs fell more than 3bps last week to settle at 0.2336% while the 10yr yield came off by more than 10bps to 1.4238%. The 2s10s curve flattened to 119bps last week, its flattest level since February this year.
• Benchmark bonds outside of the US saw similar moves with longer-end yields coming off more sharply as anxiety increases over the spread of the delta variant of Covid-19. Yields on 10yr gilts closed at 0.702%, down almost 8bps last week while bunds settled at -0.236%, off by 8bps.
• Emerging market bonds were relatively steady over the course of the week considering the wide moves in Treasuries. Yields on Turkish 10yr government bonds closed the week around 16.8%, up by 3bps, a similar move to what we saw in Indian 10yr yields. South Africa bonds managed to gain with yields down by more than 3bps on the week to 9.289%.
• Among central bank action this week, Israel sets policy on July 5th and Sri Lanka and Malaysia meet on July 8th. The minutes of the June FOMC will be out on the 7th where scrutiny will be on the arguments in favour of shifting the dot plot to rate hikes by 2023.
• The Emirates of Sharjah has mandated banks for a USD 750m sukuk issuance that could come to markets in the next few days.

FX

• The dollar managed to completely reverse the prior week’s gains as risk appetite generally wavered for much of the week. However, the better than expected headline numbers on the NFP seems to have reinvigorated markets and the dollar was offered across the board at the end of the week with a single day decline in the DXY index of 0.4% to 92.226.
• EURUSD fell almost 0.6% over the course of the week as a casualty of declining risk appetite and suffering from fears that many Eurozone economies would impose more burdensome travel restrictions in light of the spread of the delta variant of Covid-19. However, the single currency managed a pop at the end of the week, bouncing off a support level formed by the 50% one-year retracement at around 1.1795. A hold above that level should help shore up a move back above the 1.19 handle.
• The action across other currency markets was highly similar with the yen gaining at the end of the week with USDJPY down by 0.4% on the day despite a weekly gain for the pair. Sterling fell 0.4% on the week as a whole but closed up on Friday at 1.3824, a single day gain of 0.4%.
• Elsewhere the commodity currencies weakened against the dollar during the week with USDCAD closing at 1.2322, a gain of 0.24%, while AUD closed weaker by 0.84% at 0.7526 and the NZD fell 0.66% to 0.7026.

Equities

• The ‘goldilocks’ jobs data released from the US at the close of last week saw the S&P 500 push on to a new record close on Friday, gaining 0.8% and 1.7% w/w. The NASDAQ also gained 0.8% Friday, taking it to a 1.9% w/w rise for the tech-heavy index, while the Dow Jones gained 1.0% over the week. US markets will be closed to start the week due to the July 4 public holiday today.
• The rest of the world was somewhat more bearish over the week as a whole, as rising Covid-19 cases, concerns over new variants, and the prospect of extended restrictions as a result weighed on sentiment. In Europe the DAX was the only major gainer over the week (0.3% w/w), while the FTSE 100 (-0.2%) and the CAC (-1.1%) both declined.
• The fall was more pronounced in Asia, where the Shanghai Composite fell -2.5% w/w, the Nikkei -1.0% and the NIFTY -0.9%.
• Within the region the DFM lost -1.4% w/w, but there were positive moves elsewhere. The ADX gained 4.9% and  is now up 36.8% ytd while the Tadawul gained 0.5%  over the week. In Egypt, the EGX 30 lost -0.2% w/w.

Commodities

• Oil prices endured some highly volatile trading at the end of the week as the market as initial expectations that OPEC+ was going to gradually add barrels to the market from August were dashed by the abrupt collapse of any production agreement and an extension of the OPEC+ meeting until Monday. Brent futures managed to stabilize during the week, settling at USD 76.17/b while WTI added around 1.5% to close at USD 75.16/b.
• The UAE has reportedly pushed back against plans in favour of increasing collective OPEC+ output as it wants the baseline level for its own production cuts to be increased given capacity investment it has made since the deal took form. That would allow the UAE to increase production (as the base from which it would be cutting from is higher) while keeping other members’ output stable. The position from the UAE could threaten the viability of new production targets being agreed if there is no flexibility from any of the parties in OPEC+.
• The move to monthly meetings raises the risk of substantial and regular volatility coming into oil markets and if no compromise can be reached, then the risk of a price war strategy being used, like we endured in March-April 2020, is a very serious downside risk to oil prices near term.

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