Nick Spencer-Skeen, Senior Executive Officer, Lunaro Financial Markets
Friday Closing Prices
- S&P 500 7,483 (+0.0%)
- Nasdaq 25,833 (+0.0%)
- Gold $4,176 (+1.26%)
- Brent Crude Oil $72.10 (+0.42%)
Markets ended the holiday-shortened week with risk appetite broadly firmer, but the tone was shaped by a softer US labour market and a less urgent central-bank tightening impulse. Thursday’s US jobs report revealed a weaker labour market, acting to push stocks higher and Treasury yields lower to end the week.
In Europe, the Stoxx 600 hit a fresh record high and posted its strongest weekly gain since mid-May, helped by broader risk appetite and lower energy pressure. The Sintra conference kept central banks in focus, with Fed Chair Warsh reiterating his 2% inflation target while European Central Bank (ECB) officials debated whether falling oil prices reduce the urgency for another hike. In Asia, Korea’s Kospi index whipsawed on AI concerns before rebounding 5.8% on Friday as Samsung and SK Hynix rallied.
US Payrolls Cool the Hike Trade
Thursday’s US employment report delivered a clear downside surprise, with June nonfarm payrolls rising just 57k versus expectations for 110k, while April and May were revised lower by a combined 74k. The unemployment rate fell to 4.2%, but the better headline masked a softer underlying picture, with the labour force participation rate dropping to 61.5% from 61.8%.
The release reinforced the message from ADP employment data earlier in the week, where private payrolls rose 98k in June and annual pay growth held at 4.4%.
The cross-asset reaction was consistent with a shift in view towards a softer path from the Federal Reserve going forward, in that a weaker labour market could cause voting members to avoid near-term interest rate hikes. This sentiment caused stocks to rise, Treasury yields to fall, and the US dollar to weaken as traders scaled back the near-term risk of a hike. Looking forward, any move in September now looks much harder for the Fed to justify, even if sticky inflation keeps an outright easing cycle off the table.
Given that several US markets were closed on Friday, the week ahead provides more liquidity for traders to express their views on a further shift from immediate hike risk toward a slower, more conditional policy path into year-end.
Reading Between the Lines
This week we get the release of the minutes from the latest Fed and ECB meetings on Wednesday and Thursday respectively. The notes should help markets judge how durable the latest hawkish turn really is from both key central banks. The FOMC minutes cover the June 16-17 meeting, the first under Chair Warsh, where rates were left unchanged at 3.50-3.75%. The focus will be on how broad the appetite for further tightening was before the softer payrolls print from last Thursday. More detail on whether officials were more concerned about sticky inflation or labour-market cooling could either ease worries about the unemployment report or cause more valid concerns. The ECB accounts, due Thursday, will be equally important after the Governing Council raised rates by 25bps in June, taking the deposit rate to 2.25%. Markets will look for how divided officials were on the hike, given the ECB was the first major central bank to hike in this current cycle. Further, attention will be on how much the decision depended on the Middle East energy shock, and whether the recent retreat in oil prices gives the ECB room to wait until September before moving again.
A High Bar for Q2 Results
The Q2 earnings season kicks off this week, with notable names including Levi Strauss (LEVI), PepsiCo (PEP), and Delta Air Lines (DAL). After a powerful Q2 rally in global stock markets, investors have a high bar to meet in order to justify the recent move higher. The early focus over the next two weeks of reporting will be on banks and consumer bellwethers, before the larger tech names release results at the end of the month. When discussing punchy expectations, FactSet estimates S&P 500 earnings growth of 23.3% year-on-year for Q2, up from 18.8% at the start of the quarter, with revenue growth at 12.2%. That would mark a second consecutive quarter of earnings growth above 20%, with the heavy lifting being done by energy and tech. The impact of upcoming earnings will shape not only stock price action but also pass through to commodities such as gold, depending on how sensitive traders are to pivoting to safe-haven assets to protect themselves.
