Gold rallies and equities fall on stronger jobs data, rate hike risks rise

Stocks remained under pressure today ahead of an expected House of Representatives vote on the debt ceiling deal this evening that would then send the bill to the Senate. Any hint of a slip in approving the deal would spook financial markets. Domestic jobs market data was surprisingly strong, suggesting the next move in interest rates will be up. There was more disappointing economic data out of China, hitting the energy, metals and agricultural commodity markets.

TODAY’S MAJOR NEWS

Beige Book reports economic activity little changed

The Federal Reserve’s Beige Book out today reported that “economic activity was little changed overall in April and early May”. Expectations for future growth deteriorated a little, “though contacts still largely expected a further expansion in activity.” The jobs market remained robust. “Employment increased in most Districts, though at a slower pace than in previous reports”, suggesting that Friday’s Nonfarm payrolls report could offer another surprisingly strong number.

More important were comments from Federal Reserve officials Harker and Jefferson, who both suggested that they will vote to keep rates unchanged at the next meeting. Fed fund futures this morning placed the odds of another 25-basis-point rate hike at the June meeting at 69%. Reaction in the currency market to the Beige Book was muted.

Labor survey stronger than expected

Today's surprisingly strong Job Openings and Labor Turnover Survey (JOLTS) suggests that the Federal Reserve has more work to do before it will be able to bring wage inflation sufficiently under control to bring overall inflation down to the 2% mandated level.

Bottom line – risk-off

Financial markets tilted towards risk-off, but no clear direction: the Gold price rallied, signs of risk hedging, but the VIX fear index and bond yields were unchanged.

TODAY’S MAJOR MARKETS

Equity markets

• Markets were down across the board, with the S&P 500 and Nasdaq 100 down 0.5% and the more broadly based Russell 2000 off 1.2%
• The VIX index, Wall Street’s fear index, was unchanged at 17.5
• The FTSE 100 and DAX were off 1.0% and 1.6%, respectively
• In crypto markets, Bitcoin was off 2.2% to $27,061

Currencies and Bonds

• The dollar index was up 0.2% against a basket of currencies
• Yields on 2-year and 10-year Treasury ticked lower, to 4.39% and 3.64% respectively

Commodities

• Gold prices bounced back after a period of weakness, up 0.4% to $1,985 per ounce
• Crude oil prices continued to fall, down 1.4%, to $68.5 per barrel, a year-to-date low range
• Grain and oilseed markets are now showing modest losses on the day

Job postings rise, surprisingly

• Today's JOLTS report revealed job postings rose to 10.103 million at the end of April, ahead of an expected of 9.35 million
• March data was revised up to 9.745 million from 9.590 million originally posted
• This report overshadowed today’s Chicago Purchasing Managers Index (PMI) at 40.4, reflecting continued weakness in the US manufacturing sector

Investors optimistic on US, Asian markets

• State Street’s Investor Confidence Index rose to 89.8, up from 83.5 last month, suggesting investors continue to favor domestic equities
• The North American index rose 9.6 points on the month to 85.1
• The Asian index rose 11.8 points to 101.1
• The European index fell for the second consecutive month to 99.8, down 11.3 points

China’s economy continuing to slow

• China’s official Purchasing Managers Index (PMI) registered its second consecutive month of contraction for the manufacturing sector, falling to 48.8 for May (a reading under 50 indicates contraction)
• China’s service sector continues to see growth, with a PMI of 54.5, but even that growth is slowing
• China’s economy is heavily dependent on exports, and that’s a problem when US and European economies are struggling
• Many foreign buyers are decoupling from China due to rising geopolitical concerns
• Add a cooling property market and hidden local government debt issues to China’s problems, and these concerns are magnified
• China cannot have a strong economy without that outside investment, which continues to see growing headwinds from the US and Europe due to rising geopolitical risks

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com