Mixed US data puzzles traders
US stocks retreated yesterday after the S&P 500 index reached a new record high on Tuesday. The closely watched US 10-year Treasury bond yields recovered after briefly touching a new six month low of 1.1270% in the early trading hours of Wall Street. The dollar fluctuated against its major peers but ended the day on a weekly high of 92.27. Meanwhile, gold remains stuck in narrow trading range given the confusing signals received by traders.
The closely watched ADP report showed the US private sector added just 330,000 jobs in July, that was less than half the consensus forecasts of 695,000, and the smallest increase in five months. These figures came few days after Fed’s Powell downplayed delta variant’s threat to the economy at the last FOMC meeting. Will he be proved wrong? All eyes are riveted on Friday’s non farms payroll report with economists on average estimating job gains of 870,000. If the actual figure disappoints, it may signal difficult times ahead.
On the contrary, the US service industry expanded at a record pace in July. The US ISM services index blew expectations reaching 64.1 - a four points increase from the prior month. The employment index rose to 53.8, indicating growth in services sector hiring after contracting in June. This makes tomorrow’s non-farm payrolls of great importance to traders and investors who want more clues on the state of the economy.
Adding more confusion to investors were comments from Fed vice-chair Richard Clarida who said the central bank is likely to hit its economic targets by the end of next year and interest rates to rise in 2023. His comments drove market’s expectations with traders now anticipating at 56.6% of at least one rate hike by end of 2022. If tomorrows US jobs report surprises to the upside, we are likely to see the probability of an earlier rate hike increase and vice versa.
Although Powell had been insisting that high inflationary pressures are transitory, other Fed members including Clarida seem to be concerned. The debate on whether today’s inflation will prove permanent or transitory is getting hotter, and the more Fed members turn hawkish, the more volatility we’ll see in asset prices.
If an investor believes the inflation risk will materialize, he or she should add more weight to stocks of businesses that have the ability to pass costs to consumers. If inflation continues to outpace the rise in long term interest rates, gold should also benefit from this environment and will play an import role in investors’ portfolios as a diversifier.