Friday, June 26, 2020

Week ahead: Will the NFP surprise again?

NBHM Research Team

Global stocks declined last week as investors reacted to the surging coronavirus cases in the United States. According to health officials, the number of new cases was rising in almost all states, with the worst-affected being California, Arizona, and Texas. The fears were realized after Apple announced that it was closing some of its stores, and Disney was denied permission to reopen its theme park in California. Also, New York announced that it would require visitors from US hot spots to quarantine for 14 days.

The US dollar was a key beneficiary of these woes as nervous investors and businesses rushed to its safety. Gold also benefited as its price reached its highest point in seven years while crude oil dropped. Meanwhile, New Zealand and Turkish central banks left rates unchanged, and the Mexican central bank slashed interest rates by 0.25%.

Gold: Gold price rallied last week as the number of coronavirus cases rose in several countries like the United States, Germany, Japan, and South Africa. Investors believe that these cases will lead to more interventions by central banks, including the Federal Reserve. The challenge is that these banks don’t have much room left to manoeuvre. For example, the Fed has initiated an open-ended quantitative easing program, which has created almost $3 trillion.

Its balance sheet is at a record high of more than $7 trillion. Therefore, as the crisis extends, it increases the likelihood of negative interest rates in the US. This week, we will be watching the coronavirus situation and several important economic data. The daily chart below shows the performance of gold since September 2018.

NBHM Weekly overview

US dollar: The US dollar rose against major currencies because of risk aversion. This week, as with gold, the currency’s movement will depend on the growth of coronavirus cases in the US and elsewhere. The currency will also move, depending on key economic numbers. The most important data will come on Thursday when the Labour Department will release the June non-farm payrolls.

Analysts expect that the unemployment rate will drop from the previous 13.3% to 12.2%. Also, they expect that the economy created more than 3 million new jobs in June. Other expectations are for average hourly earnings to fall to 34.5 and manufacturing payrolls to drop by 440k. Other important numbers from the US will be ISM manufacturing PMI, pending home sales, and Conference Board’s consumer confidence.

Euro: The euro pared back some of the previous gains last week as investors rushed to the US dollar. That was even after the upbeat manufacturing and services PMI numbers. The data, which came on Tuesday, showed that business activity was improving as states eased the lockdowns. The currency also declined after the US revealed plans to impose tariffs on goods worth more than $3.1 billion.

As with the US dollar, the key driver for the currency will be the coronavirus issue. The currency will also react to key economic data from the region. Today, we will receive consumer confidence numbers from the eurozone and preliminary CPI data from Germany. On Tuesday, we will receive the preliminary CPI data from the eurozone. On Wednesday, Markit will release the final PMI data. Other numbers to watch will be PPI and the unemployment rate.

Japanese yen: The Japanese yen wavered last week as investors reflected on the weak manufacturing PMI data from the country. Investors also reacted to the rising number of coronavirus cases in Japan and the falling ratings of Prime Minister, Shinzo Abe. This week, we will receive key economic data from the country. On Tuesday, the statistics office will release the May employment numbers. Analysts expect the unemployment rate to increase slightly to 2.7% from the previous 2.6%. The jobs/applications ratio is expected to increase to 1.33.

On Wednesday, the Bank of Japan will release the closely watched manufacturing index for the second quarter. Analysts expect the data to disappoint because the economy was in a lockdown for the most part of the quarter. For example, they expect the large non-manufacturers index to fall to -18 from the previous -29. The large manufacturers data, on the other hand, is expected to drop to -31. The latter number is important because Japan is mostly a manufacturing economy. The daily chart shows that the USD/JPY pair is below the 100-day and 50-day EMAs.

NBHM Weekly overview

Silver: Silver price rose in the first two days of the week in reaction to the upbeat manufacturing and services data by Markit. The price reached a weekly high of $18.05. The price later dropped as investors started to worry about the health of the global economy. While gold and silver are both precious metals, silver has more industrial uses. This is because most of the mined silver is used to manufacture jewellery and cutlery, among others. Therefore, this week, the price will be influenced by both economic data and the numbers on infections.

Crude oil: After weeks of gains, the price of crude oil reversed its gains because of the coronavirus fears and higher inventories in the United States. With cases rising in the United States and elsewhere, there are chances that there could be more stay-at-home orders. These will affect demand. Meanwhile, data by the American Petroleum Institute (API) and the Energy Information Administration (EIA) showed that inventories rose in the previous week. This week, we will watch out for the trend in inventories growth.

British pound: The sterling declined last week because of risk aversion. The currency also reacted to Boris Johnson’s plans for reopening the economy. This week, we will watch out for progress on Brexit since the deadline for requesting an extension has passed. In addition, we will watch out for other key numbers like Q1 GDP, mortgage applications and approvals, and PMIs.

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