Disappointing US jobs report keeps the rally alive
Asian stocks kicked off the week on strong footing as US hiring came in far short of expectations on Friday. The disappointing non farms payroll report fueled expectations that tapering of asset purchases will likely be delayed by the Federal Reserve. The chances of September taper are now reduced dramatically, implying that a rally in bond yields and the dollar will be in check for some time, both of which are negative for risk assets.
It seems we’re back into “bad news is good news to stock markets”, but that wouldn’t hold for long if corporates profitability slows significantly in the third quarter. However, one data point is not sufficient unless it becomes a trend.
The key takeaway from Friday’s jobs data is the Delta variant of the coronavirus is now in control of the economy. After 415,000 jobs were added in July in leisure and hospitality, the sector didn’t add any new positions last month. Employment in the industry remains 10% down from February 2020 and would take long time to return to pracademic levels.
On the bright side, salaries continued to rise. Average hourly earnings increased 0.6% from July taking year-over-year gains to 4.3%. While this is good news for US workers, it may suggest that inflation could be more persistent than previously thought. If jobs slow down over the next few months, and inflation remains stubbornly high, the biggest fear will become stagflationary forces building up. An inflationary period accompanied by high unemployment is the trickiest combination for policy makers to tackle, and investors need to be more cautious in the weeks ahead.
With US markets closed today for the Labor Day holiday expect liquidity to remain low in financial markets. But traders will have a busy week with central banks decisions from RBA, BoC and the ECB, the fate of President Biden’s $3.5 trillion spending package is also in focus, and for those tracking inflation trends, China’s CPI and PPI along with US PPI will be released later in the week.