Overnight Headlines

*USD jumps on strong NFP, hitting a four-month high vs the euro

*US stocks closed mixed, Dow outperformed the tech-heavy Nasdaq

*Gold dropped more than 4% in thin Asian market conditions

USD surged higher to a two-week top after the strong NFP report. This stoked bets that a taper in asset purchases could start this year with higher rates following as soon as 2022. DXY bulls have their eyes set on the July high at 93.19. EUR/USD is currently trading just above support around 1.1750 with the cycle low at 1.1704. USD/JPY and USD/CHF punched above their 100-day SMAs also hitting two-week highs.

US equities saw major sector rotation as bond yields pushed sharply higher after NFP. (The US 10-year Treasury yield rocketed higher last week from lows at 1.1270% to today’s high at 1.3050%). Banks and financials outperformed growth stocks. This saw the Nasdaq close nearly half a percentage point lower. The VIX has dropped back close to 16. Asia is generally positive, but futures are lower led by growth stocks.

Market Thoughts – Beyond NFP and ”substantial further progress”

Friday’s stronger-than-expected US jobs report makes it more likely that Fed Chair Powell will drop strong hints about tapering at Jackson at the end of the month. NFP saw the highest job growth in 11 months and unemployment fell by half a percentage point to 5.4%. Annual earnings growth rose by 4% versus 3.6% the month before. Markets now await this week’s CPI data to see if higher wage growth pushed up broader inflation.

With unemployment benefits expiring in early September in many states, healthy jobs gains should continue. But remember that the number of US jobs is still over 5.7 million below the pre-pandemic February 2020 level. Labour supply is the key issue here as there is not a demand side problem. This should improve in time which should mean pressure on wages is set to intensify further.

The Delta variant is one issue that may affect data going forward, especially as much of the July job gains are in the tenuous hospitality sector. There is one more monthly report before the FOMC September meeting. All being well, data is positive for the dollar versus the euro and yen, currencies with central banks in the policy normalisation go-slow lane.

Chart of the Day – Gold flash crash

The better jobs data propelled the greenback and US bond yields higher which is never a good thing for commodities. Gold sank over 2.27% Friday down to June support just above $1750. Holidays in Tokyo and Singapore today saw an even sharper move lower. In thin trading conditions, gold plunged $73 within 10 minutes of the Asian open.

Prices dropped to a low of $1684 before retracing back near to $1750 support. The March double bottom lows lie around $1676/7 so held the flash crash. June support is now crucial at $1750. There is also long-term uptrend support in this area.