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MARKETS

The S&P 500 and Nasdaq indexes skyrocketed to record closing highs on Wednesday, buoyed by tech stocks. Markets eagerly gobbled up economic data, suggesting the Federal Reserve might finally loosen its grip on monetary policy. The May private payrolls report hinted at a softening labour market, potentially nudging the Fed toward rate cuts this year. This came hot on the heels of Tuesday’s revelation that April job openings fell to their lowest level in over three years.

It seems the once robust labour market is loosening its belt a notch. Investors are getting giddy again, hoping the Fed contemplates its next move soon, eagerly anticipating a rate cut as early as September to keep the good times rolling.

ADP's report on Wednesday highlighted “notable pockets of weakness” in the US labour market, as indicated by the soft headline figure. The private payrolls came in at 152,000, missing the consensus of 175,000. While 152,000 isn’t terrible, the miss adds to a series of weaker economic prints, suggesting that the US economic giant is finally losing some momentum. However, it’s too early to call a recession, as the core of US economic growth held strong in May.

A robust read on a critical gauge of services sector activity interrupted this streak of cool economic data on Wednesday. The ISM services index came in at 53.8, well above the consensus of 51, marking a convincing return to expansion territory after a brief dip below the previous month's threshold.

The mix of economic signals continues to befuddle macropurists. However, with inflation off its peak, the Fed is likely keenly focused on employment metrics showing weakness.

Before continuing with the global stock market rally and the expected clearing of long US dollar positions, investors must pay attention to important releases, including NFP, CPI, and PPI. The Non-Farm Payroll (NFP) report is scheduled for release on Friday, and market reactions could be volatile if there is a lower-than-expected result. A significant miss could revive concerns about a recession and lead to a sharp stock decline. Therefore, there are both positive and negative risks that investors need to consider.

For now, the weaker economic data has reduced pressure on rates, providing some relief for the bond market. A week ago, bearish sentiment dominated, mainly after bond traders ignored a series of US government debt auctions. A bit of short covering, combined with recession hedging, had seen the 10-year yield drop to 4.28%, a scenario unthinkable only a week ago when discussions centred on reaching 4.75%.

FOREX MARKETS

Lower yields should see USD/JPY trading below the current 156 level, but the persistent "carry trade" appetite continues to support the pair on dips. Dislodging Mr. Watanabe and the hedge fund crowds piled into the JPY-funded carry trade this year remains the biggest short-term obstacle to a lower USD/JPY.

However, with 10-year US yields just a few softer data prints away from testing 4%, the path of least resistance should be downward. This is especially true as the Japanese government will likely pressure the BoJ to stabilize the yen by hiking rates in July (expected 0.15%, but a 0.25% hike would be a huge surprise) and reduce the bond purchasing program by 20%. But from my seat, the path of least resistance for USDJPY is currently lower. 

Still, most currency pairs don’t seem entirely convinced by the latest decline in US yields. EUR/USD remains relatively unchanged at 1.0874, likely in stasis ahead of today’s ECB meeting and the anticipated 25 basis point rate cut. Additionally, the looming Non-Farm Payroll (NFP) report, this week's marquee event, is likely keeping most traders in check.

OIL MARKETS

Counterintuitively, oil prices recovered in the New York afternoon session despite the Energy Information Administration reporting that crude oil stockpiles expanded by 1.23 million barrels last week. More concerning was the weakening demand for road fuels, with inventories rising for gasoline and distillates and implied demand falling to 8.95 million barrels per day and 3.4 million barrels per day, respectively.

As we suggested yesterday, the selloff might have been overdone and stretched short positioning created a recipe for profit-taking. Hence, we may have witnessed a rally for no other reason than the downside move had gone too far. The oil market tends to work in very mysterious ways, and the longer you trade them, the more you will understand the sometimes rhymeless logic.

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