Weekly Commentary 12 August 2021
Weekly Market Commentary
US Treasury yields reacted to the latest US jobs report showing a pickup in employment
The US jobs report caused some volatility in markets on Friday. However, equity markets still hit all-time highs last week. With the employment report released, all eyes this week will be on the US Consumer Price Index (CPI) number which, despite higher numbers being shrugged off in recent months, remains a critical test for the equity narrative.
The US jobs report, which was released on Friday, beat market expectations, showing that 943,000 new jobs had been created in July versus expectations of 870,0001. Last month’s reading was also revised up, meaning that the overall unemployment rate fell from 5.9% to 5.4%2. Given the recent focus of US Federal Reserve (Fed) Chair Powell on the employment numbers, and specifically the breadth of the jobs recovery, the report had a significant impact on the US Treasury market. After comments from Fed Vice Chair Richard Clarida last week, the US 10-year Treasury had already risen significantly from its Wednesday levels and currently trades just shy of 1.3%3. Earlier in the year, there was concern that labour supply issues were holding back the recovery. However, with the headline unemployment rate falling significantly over the month and demand for workers clearly evident, it was cyclical equities which rallied hardest in the aftermath of the report.
All eyes this week will be on Wednesday’s US inflation number which is expected to start to fall
The two biggest hurdles for equities at the moment are arguably the jobs report and the US inflation release. The US CPI figures come out on Wednesday, with the economist consensus pointing to a fall in the headline year-on-year rate from 5.4% to 5.3%. The core inflation figure (excluding food and energy) is expected to fall slightly more, to 4.3% versus 4.5% last month. The recent beats have been driven, in large part, by the blockbuster gains in used cars and trucks and ‘lodging away from home’. There are some signs that the pressure within used cars is starting to fade but this may take several months to feed through to the CPI figures. Should the semiconductor shortage continue to ease, this will affect this sub-component as well as many others, albeit to a lesser degree.
Close attention will be paid to the used car inflation index which has been a key driver of the recent datam
The US CPI number will be another test of US Treasury yields after a week of significant moves. Economists are expecting the inflationary impulse to start to flatten so any sign of significant continued momentum could lead to a questioning of the transitory inflation narrative and cause equities to stir from their summer slumber.
1 Bloomberg, 6 August 2021 (https://www.bloomberg.com/news/articles/2021-08-06/u-s-job-growth-accelerated-in-july-unemployment-rate-falls)
3 Bloomberg, 9 August 2021 (https://www.bloomberg.com/markets/rates-bonds/government-bonds/us?sref=CZCP1vND)
The Week In Numbers