The S&P 500 climbed to a record high on Friday, spurred by renewed optimism for President Joe Biden's $1.9 trillion Covid-19 relief plan, following a weak jobs report.
The US January employment report is nearly perfect from a market point of view as it will justify full-throttle stimulus from both monetary and fiscal concerns. For President Biden in particular, payrolls make quite a big difference in providing the justification he needs to go full steam ahead towards USD1.9 trn. Unquestionably on Friday's jobs clunker, there will be a growing belief that he could get relatively close to that number through reconciliation. And if last week's budget resolution gets passed, it will most certainly post upside risk to most assumptions.
And while the NFP headlines came up lemons, the S&P closed higher as the details under the job hood are not that bad. After adjusting for the longer workweek embedded in the data; investors could take a more sanguine view because it is evidence that overall labour demand is rising.
The truth is that data events, good or bad, seem to matter for about 8 hours then markets go back to trading global macro, S&Ps and gold. With the Fed nowhere close to being in play, I’m not sure any NFP impact lasts.
In the absence of a heavy dose of macro data this week, head and shoulders above anything else – especially with the Biden stimulus effect fueling markets – inoculation rollouts and the curve flattening will drive risk this week. And, optimistically on that front, the latest curve data suggests the flue might finally be retreating. While at this stage it's mostly a result of lockdown abatement, the vaccine immunity effect should kick into gear over the next few months. As the CV19 curve flattens, further encouraging more reopenings, the gale-force stimulus tailwinds should rocket risk into the stratosphere.
Of course, a high-end stimulus downpour would see the US return a smidgen more quickly to full employment, but at what costs? Too much of a good thing soon becomes unpleasant given the potential costs of unwanted upside inflation, a massive increase in national debt and additional political polarization.
Oil ended the week higher (WTI: +9% w/w, Brent: +6% w/w) with price support coming from supply curbs by OPEC+ and improved demand optimism due to the vaccine rollout.
Oil is trading higher at Asia open, getting a kick start from the US stimulus effect and a slightly weaker dollar. In addition, preliminary OPEC production data for January also suggests compliance with OPEC+ quotas improved in January.
And with the virus showing signs of burning out – albeit from lockdown abatement – and with vaccines rolling out faster than energy markets predicted, oil traders feel comfortable adding length at current prices – even more so with China demand holding up despite higher physical market prices.
A feature of the oil market is that it is cyclical, it does tend to gather momentum, and it rarely finds a comfortable equilibrium. So, while the market is tightening, it’s doing so with a colossal spare capacity figure sitting in the background getting dismissed as traders become more convinced that consumption will soon pick up considerably in the US due to faster than expected vaccination protocols.
The NFP threw a damp cloth over the US exceptionalism trade but if truth be told the EURUSD downside momentum was floundering pre NFP above and beyond your usual NFP short covering. While the NFP data rubbed salt in the dollar bulls’ wounds, underscoring that the US is not immune to Covid-related drags on activity, it should keep Fed communication relatively dovish over the short-term.
The real story now is that the vast EURUSD seller looks to be done and positioning has flipped from max long to somewhat flat.
The divergence in the dollar's pair-wise performance, with the lift-off in oil prices providing a keen bullishness source for many cyclical currencies, saw the commodity block (CAD-AUD-NZD) off to the races post NDP.
Less comforting for high-beta FX – albeit without any adverse stock markets spillover – was the renewed push higher in US bond yields. We’re nearing the point where traders stop viewing higher yields through a resurgent cyclical positive light, and now fears of monetary tightening take over.
Malaysia is experiencing the worst Covid outbreak in Asia and a renewed MCO is likely to hit services growth in the short-term and is weighing on the Ringgit. Still, the continued ascent of oil prices provides an essential reassurance source for the Malaysian market and the Ringgit. Strong exports and a stronger RMB could see the ringgit trade with a favourable bias, but any renewed push higher in US yields could dampen sentiment.
Gold traded higher post-NFP on a weaker US dollar impulse, and likewise this morning in Asia, gold has opening bid on the same impulses.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower