NFP Reaction: Unemployment Rate Shocker, Dollar Rally Remains, Commodities sink

US stocks are trying to muster up a rebound just like what has happened in past selloffs during the pandemic.  Some buyers did emerge after the sharp pullback saw some of the high fliers, Apple, Tesla, Microsoft, Netflix, Zoom, and Peloton, all drop between 5-10%.  Stay-at-home stock valuations were out of control and while many investors will likely buy every dip, with fading fiscal support, risks remain that we could see this unwind last a little longer. 

NFP

A solid labor report will slightly complicate the Fed’s ultra-accommodative stance as the unemployment rate has already improved to 8.4%, much better than the end of year forecast set in June for 9.3%.  The headline nonfarm number came a touch higher than forecast at 1.371 million, the fourth straight million-plus monthly gain. 

The economy seems to be filling positions for people that were on temporary layoff, with that component decreasing by 3.1 million in August to 6.2 million, which is much better than the series high of 18.1 million in April.  Americans having permanent job losses increased by about half a million to 3.4 million, the highest level since 2013.  This was a good employment report as more people came into the workforce and were able to find jobs, but a lot more work needs to be done to foster the labor market rebound. 

The labor market rebound is intact, and Washington DC seems like they won’t be pressured into doing much more for the time being.  The Fed was expected to become more accommodative over the next few months, but if the labor recovery continues, we might see slightly less stimulus down the road.  The Fed’s actions mean a steeper curve is likely as they try to spur inflation and let the labor market run hot.  The next round of stimulus along with the Fed’s new inflation strategy will help drive higher yields for lengthier maturities. 

Oil

Crude prices can’t shake off the strong dollar that emerged from a strong employment report.  Oil prices are poised for a weekly decline but seem they won’t break below the lower boundaries of the tight trading range that has been in place over the last couple of months. 

Oil was initially rebounding on more positivity from vaccine developments and optimism with oil demand.  Russia’s potential COVID-19 vaccine saw strong phase 1 and 2 trial results in the Lancet medical journal.  Russia’s vaccine was heavily scrutinized by the rest of the world, but this report seems to be very promising as produced a response in T-cells, what could help the immune system fight the infection.  The crude demand outlook will improve drastically if we see a handful of vaccines get the the greenlight.  Russian energy minister Novak noted that oil demand has returned to 90% of pre-crisis levels. 

Crude prices will likely take their next queue if the global market selloff is short-lived. 

Gold

Gold prices are getting beat up as the US labor market continues to show signs it’s improving more quickly than expected.  Gold is vulnerable to test the lower boundaries of its trading range after an encouraging jobs report provided a strong dollar and dented some stimulus prospects.  Gold’s longer-term bullish trend will need to wait a little longer before reasserting itself.  Despite eye-dropping improvement with the unemployment rate, too much permanent job loss remains and right now it only seems the temporary jobs are coming back. 

One of the key pillars to the bullish case for gold is improving demand and that got a strong boost after India doubled their bullion imports last month ahead of the Ganesh Chaturthi Festival. 

Gold should see strong buyers emerge if the $1900 level is tested. 

CAD

The Canadian dollar is the best performing currency after their economy added 245,800 jobs in August, recovering almost two thirds of their job losses during the coronavirus pandemic.

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