Challenging Week Ahead

If there are more sustained outflows from China, the natural question arising is where they may go. However, in the first instance, it seemed to weigh on global equities. Interest rates fell, and curves tended to flatten, which is also consistent with delayed or weaker recoveries, making price pressures less likely to be sustained.

In the foreign exchange market, the spread of the Delta variant and Chinese developments weighed on those currencies that are perceived to be levered to world growth, with relatively high volatility, and frequently seen as an expression of risk appetites: the dollar-bloc and Scandis, and all but Sweden were seen to be ahead of the Federal Reserve in adjusting monetary policy.

As a result, they have underperformed over the past few weeks. At the same time, the strongest two currencies, the yen and Swiss franc tend to be used as funding currencies to purchase higher returning or more volatile assets. As the risk assets are liquidated, the funding currency is typically bought back. However, as July drew to a close, the funding currencies are lagging behind the dollar bloc and Scandis.

The high-frequency data highlight of the week ahead is the US employment report. Once again, some economists are forecasting an increase of more than a million jobs in July. After the nearly 20.7 million loss of employment in April 2020, the US did add more than a million jobs in May-August last year.

June's 850 thousand estimate is the largest so far this year. The median forecast in Bloomberg's survey anticipates July's nonfarm payrolls rising by about 900 thousand, which has drifted a little lower in recent data. Job growth, largely people returning to their jobs, averaged 567 thousand in Q2 after 518 thousand in Q1.

The unemployment rate is projected to fall to 5.7% from 5.9%. At the end of 2019, the average unemployment rate for the past decade (120 months) was 6.2% and 5.9% for 20-years (240 months). The underemployment rate (U-6) has fallen from nearly 23% in April 2020 to 9.8% in June. Not to include the impact of the pandemic and recovery, we looked at the same long-term averages as of the end of 2019, and they stood at 11.7% and 10.7%, respectively. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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