Markets vaccinate ahead of non-farm payrolls

Equity markets turned in a solid performance overnight, driven by a surprising rebound in US ADP Employment data and positive Covid-19 vaccine trials from Pfizer. That sentiment has spilt into Asia this morning, buoying the mood as the region’s stock exchanges continue this week’s march higher. Based on a vaccine trial containing 45 people, including placebos, the V-shaped recovery gnomes are, once again, reaching for the sky.

To be fair, the financial markets have reason to cheer. Yesterday, the plethora of PMI releases from around the world showed an almost universal improvement, albeit from a very low base in May. Oil consumption also appears to be rebounding, with data suggesting floating stocks are being drawn down at a rapid pace, and official US crude inventories showing a massive drop overnight.

Financial markets completely ignored the continuing explosion of Covid-19 cases across the US sunbelt states in the name of being “forward-looking.” It can be tough being the voice of reason as, more often than not, nobody will listen. I would also be remiss not to highlight that Covid-19 presents the severe risk of a double-dip to the US recovery, especially with the US president seemingly missing in action on this issue.

With the US on holiday tomorrow for Independence Day, Friday’s usual data releases have been moved forward into a show with everything but Yul Brynner this evening. Non-farm payrolls, Continuing Jobless Claims, Hourly Earnings, Balance of Trade and Factory Orders all hit the ticker this evening, to name but a few.

Non-Farm Payrolls are likely to be the most closely watched, especially after the overnight ADP Employment Change data. The June headline number came in substantially lower than forecast with 2.369 million jobs added. However, it was the colossal revision to the May data that caught the market’s attention.

May’s data was revised from a loss of 2.76 million jobs, to a gain of 3.065 million jobs. Although a disconnect between the ADP and official government data is not unusual, both ADP and government officials have said collecting accurate data has been challenging, as evidenced by the surprise jump of 2.5 million jobs in the May non-farm numbers.

The US economy is expected to add another three million jobs this evening, with Initial Jobless Claims expected to ease to 1.355 million, and Continuing Claims also reducing to 19.0 million. Given that even government sources are casting doubts on the integrity of the data, the non-farm payrolls print should be taken with a massive dose of salt. Things in the US may not be nearly as rosy as they seem. Yet again though, financial markets are unlikely to let the facts get in the way of a good story, with a firm finish to the US trading week almost assured.

Geopolitics will potentially provide a few banana skins into the week’s end. Naturally, it is mostly centred on China. Hong Kong’s security bill was imposed into law by Beijing on Tuesday night, and the first arrests under its provisions were made yesterday. Bills censuring Chinese officials are making their way through Congress as we speak. South Korea has spoken out in support of Hong Kong’s SAR status this morning.

Most interestingly, Australia’s Prime Minister, Scott Morrison has said that Australia is considering making the country a haven for Hong Kong after the imposition of the new security law. I wish him all the best in selling this idea to his electorate.

I mentioned yesterday in regard to Hong Kong, that money talks. That certainly appears to be the case today, fewer protests being better for business. The Hang Seng has risen 1.30% this morning with nary a security law discount to be seen. The response of the international community, and China’s response back, do represent a potentially serious headline risk into the later part of this week.

The picture across Asia is a positive one today, and we fully expect that pattern to flow into Europe, swept along in the current of vaccine hopes and improving economic data. With financial markets refusing to look under the hood of US labour market data, only a very very poor result from the US data dump tonight will derail this week’s rally.

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