USTs richened along with Euro Govies in London hours Friday and rallied into higher than expected NFP numbers at 8:30 am EST. Change in NFP was +850k – higher than both the 720k survey number and the 785k-800k whisper numbers – and the long end whipsawed but eventually cheapened into 9:30 am on a kneejerk reaction while the belly and front end rallied steadily.

A slightly higher unemployment rate (5.9% vs 5.8% prior, and 5.9% vs 5.6% expected) and unchanged labour for the participation rate probably increased dovish sentiment. 

The NFP beat was a distant memory by lunch, and traders likely cleaned up offside risk. Flows consisted of mostly belly-driven steepeners, and slightly better buying in 5s and 10s. At the same time, some participants started to hedge for delta variant complications. The reality check that the Fed would not hike rates as early as previously thought set in, as there is uncertainty regarding how the labour market will react to expiring COVID benefits. The idea of the Fed hiking later helped drive stocks to another record close.

After today's print, the US still has a 6.76m jobs gap compared to employment levels before the pandemic. If the payrolls could average 1 million going forward, it would still take six months to get full employment. And this argument could push back tapering into 2022.

At some point, with the delta variant onshoring virtually everywhere, sentiment might shift towards a more cautious stance, benefiting US assets, including the dollar, driven stronger by safe-haven demand. Indeed the covid-19 Delta variant is a growing problem worldwide, with only the US largely immune given high vaccination rates, which means it is improbable there be new mobility restrictions. The UK might be right behind the US in shaking off Delta, but that won't be clear until the July re-opening is confirmed. Still, I think central banks might err on the side of caution and point to Delta as an excuse to remain dovish.

Week Ahead 

On Wednesday, the FOMC will release the minutes of its June meeting. Given the ongoing debate about how hawkish the meeting was, the minutes are likely to receive considerable attention.

Tuesday is the primary day for economic data, with the release of the German ZEW surveys, US ISM Services, and Eurozone retail sales. Other noteworthy releases include US JOLTS on Wednesday and UK monthly GDP & industrial production on Friday.

US markets will go into an early trading halt on Monday for the Independence Day holiday. Exchange volumes are likely to be much lower throughout the day.