The S&P 500 stock index reached a new all-time high Thursday, which is the market reaction to the publication of the ISM and ADP reports, as well as to the comments of the Fed members. Note that the data came out ambiguous, but the markets interpreted them with a bullish bias, which affected both the growth of stock indices and UST yields. The 10-year bonds renewed weekly high, which indicates a reassessment of the Fed's hawkish outlook.
Let's start with ADP. Employment in the US private sector rose in July much less than expected, with only 330,000 new jobs created, which is the lowest in the last 5 months.
The first reaction of the market to the report was slightly negative, as the correlation between ADP and nonfarm payrolls is still not direct due to the difference in valuation methodologies.
The ISM report turned out to be much more optimistic, the index in the services sector climbed to a record level of 67%, but more importantly, the employment index immediately rose by 4.5p, to 53.8p. There is an acute shortage of labor, especially qualified personnel.
The dollar was supported by a comment from the Democratic camp, with Senator Manchin saying he was worried about inflation and that "the Fed should immediately begin to taper its emergency stimulus response."
Possible movements will begin after the publication of the nonfarm payrolls report. Forecasts vary greatly, the range is from 350,000 to 1.2 million new jobs, unemployment is expected to decline from 5.9% to 5.7%. Currently, the number of jobs in the economy is 6.8 million below the pre-pandemic level and 9.1 million below the trend level (if there were no covid). Today's data will have the strongest impact on investor expectations through early September.
EUR/USD
The European economy is recovering at a good pace, but the ECB is likely to pause until the last, limiting itself to monitoring inflation. Policy rates will remain at or below current or lower levels until the ECB sees inflation hitting 2% well before the end of its forecast horizon and staying steady until the end of the forecast horizon, as evidenced by core inflation.
The eurozone economy grew by 2% in Q2, PMI is hovering near 60p, indicating a solid recovery.
Domestic catalysts for the euro are neutral and movements may be driven by a reaction to external data. If the nonfarm data come out no worse than expected today, EUR/USD will resume its decline, and a movement to 1.17 can be expected. If the report turns out to be negative, then re-positioning will begin in the markets due to the increased likelihood of an "empty" outcome of the AHC meeting in September. The euro-dollar may resume growth with the initial target at 1.1950, and the long-term one will be the trend line built on the local annual high, which is expected to create resistance in the 1.2150/2200 zone.
GBP/USD
The Bank of England left the main parameters of monetary policy unchanged at the end of the meeting on Thursday, but there is no unity in its ranks, and the comments are contradictory. The changes affected the format of the exit from QE, the Bank of England announced that it intends to reduce the volume of QE, ceasing to reinvest assets with maturity, as soon as the bank's interest rate rises to 0.5%. Earlier, such a barrier was announced at 1.5%. However, for the market, there is no big difference - that half a percent, that one and a half - it is much more important when the first increase will take place. Since the BoE traditionally lags behind the Fed in its actions, it must be assumed that the chances of some unexpected bullish decision in September are illusory, and the pound, in fact, has no internal driver for growth.
We assume that the pound has formed a local maximum just below the resistance of 1.40. We expect a decline to the range of 1.3770/3820 and consolidation in anticipation of the results of the AHC meeting in September.
