Dollar drag on stocks resumes ahead of payrolls

U.S. stock index futures rolled over after a positive start for the 9^th time in 10 sessions on Friday, underscoring the drag on equity market momentum from dollar and inflation concerns that have now dogged trading for around three months. Investors may need more evidence of strengthening sentiment than U.S. markets erasing much of their losses towards Thursday’s close, though with indices largely flat as we head into the middle of the year after what’s shaping up to be the biggest weekly fall for global shares, participants will be alert to any sign of a turn.

European shares continued their outperformance of Asia and North American markets since basing towards the end of March, though here, the bank sector stood out on the downside following disappointing first quarter earnings from HSBC. Still, solid earnings from large index constituents of German indices, the FTSE 100’s ICAG, owner of British Airways, and others, provided a positive tilt for benchmarks like the STOXX Europe 600.

Markets on this side of the Atlantic have however been prone to the same U.S. yield and greenback-related fears that have stoked turbulence for global shares, so the afternoon’s U.S. monthly employment data will be critically important. Updates on average weekly earnings growth will receive the most airplay, as they have for months, due to their relationship with a potential quickening of inflation that could encourage the Fed to tighten policy more aggressively. The central bank tacitly affirmed on Wednesday that it intends to conduct three 25 basis point rate rises this year, after the first in March.

On a monthly basis, average hourly earnings were forecast by consensus compiled by Thomson Reuters to rise 0.2%, a slight fall from the month before when wages inched 0.3% higher. The annual rate of growth expected was 2.7% after 2.6% in February. Given the market’s rapt attention on how inflation signals could impact policy, the dollar, already reversing a broad consolidation over the last two days, is likely to stride higher again should wage growth readings beat forecasts. Headline payrolls were forecast to be 192,000, after a below-long-term-average 103,000 new jobs were created in March. Absent another large upside or downside surprise, the jobs data will play second fiddle in terms of their ability to move market sentiment.

Trade talks between the States and China were also in focus, particularly after Treasury Secretary Steven Mnuchin’s off-hand comment to the media as he embarked on the final day of discussions with Chinese Vice Premier Liu He, that they were “having very good conversations”. The encouragement may have given a fillip to sentiment, though markets have expressed some scepticism about both the process of the talks and what they could achieve. Unless concrete pathways to agreements emerge from the negotiations that could lower the temperature of a U.S.-China trade situation that was spiralling into full-blown conflict just weeks ago, a breakthrough from the talks looks unlikely.