Shares fade pre payrolls post tariffs

Summary

An increasingly relaxed tone to global stock markets on the countdown to tariffs looks too surreal to sustain for much longer.

Rhetoric ratchets

Rhetoric from both Beijing and Washington has ratcheted up to an increasingly combative level over the last 24 hours in the final run-up to mutual tariff launch. But it is Chinese stock markets and the yuan that have borne the brunt of escalation fears, and they both edged off lows into the close. Elsewhere, equities are still having a fair week. European and U.S. indices have inched higher even ahead of always closely scrutinised payrolls data, showing relative relaxation about the expected contents. Another positive start for U.S. and European equities on Friday suggests trade anxieties are somewhat less sensitized as the first actual shots are fired. An EU/U.S. truce on car tariffs may prove more tentative than relief that underpinned Thursday’s trade suggests. But the interpretation that Washington trade policy could be evolving enough to forestall worst-case scenarios keeps risk appetite aloft.

Hands near the Treasury tiller

Still, the Treasurys bid that pulled yields to Thursday’s 2.82% 5-week lows hasn’t strayed too far. It’s yield pressure that also helps keep the dollar capped, as it consolidates a 7% rally off February’s three-year lows. But Treasury investors look positioned for the snap back. Tightening dollar liquidity that goes hand in hand with the U.S. economic growth outpacing all comers will see upward pressure on the greenback resume—possibly as soon as Friday. Payrolls and earnings may not need to overshoot expectations much. Indecision betrayed underlying sentiment in riskier markets earlier this week and once the dollar pause comes to an end, risk-aversion is set to fade back in. Wall Street futures had already faded to red at last look. European indices were still positive but also retreating.

Yuan policy leeway

It was optics of a dollar/yuan spot rate hitting 11-month lows with alarming speed that unsettled shares in China and eventually globally. However, it is also notable that measures of trade-weighted yuan (for instance China Foreign Exchange Trade System’s Renminbi Index) only turned slightly negative for the year on Thursday, ticking back above the flat line at last look. Relative global yuan exchange rate stability help explains the moderate tone of Beijing’s concern on USD/CNY’s tumble so far. It also implies policymakers can afford incrementally further depreciation, by official default or outright design, should trade impact warrant further loosening. It’s another reason to see only a temporary floor for the yuan and to expect that dollar rebound.

Fed shrugs off ‘concerns’

If Federal Reserve minutes out last night carried any new take on June’s hike, it was that the Fed is becoming keener to flag “concerning” tariffs as a potential brake on growth, that is not yet an actual brake on growth. The FOMC is also studying the flatter yield curve, though the tacit message is that policymakers remain unmoved by that as well. All in, until any trade hit to the economy materialises, the minutes pointed to the hurdle for a pause in tightening staying high. Range expansion over the last few days to the upside by euro, sterling, loonie and Aussie is looking stretched as I write, suggesting a payrolls beat could cap their retracement.

Wages are tinder paper

As per the last few months, headline hiring is not the main watch, though even there, jobs market tightness abounds even in the event of moderate slippage below the 200,000-mark that consensus sees. Hourly earnings growth is still the tinder paper. The market is looking for 2.78% after 2.7% firming on the year in May. The monthly increment will be the trigger. Three basis-point variance between consensus and May’s 0.3% rise is also a volatility signal. The bias is clearly to the upside on both hiring and earnings though. Canada’s jobs growth and unemployment rates are also expected to fluctuate in data out later, though non-farm data will have more impact, as usual.