MARKET WRAPS
Watch For:
U.S. Employment Trends Index for September; Federal Reserve Bank of Chicago President Charles Evans speaks at the Lawrence R. Klein Award virtual ceremony; U.S. Columbus Day, bond markets are closed; Canada Thanksgiving holiday, financial markets are closed.
Opening Call:
Stock futures ticked lower, while prices for crude oil and natural gas extended their climb.
Third-quarter earnings season will kick off this week, and investors are awaiting insight into the impact of stickier-than-anticipated inflation, brought on by supply-chain disruptions, labor shortages and surging energy prices. Some are worried that higher costs for products and energy could crimp demand, while winter could lead to a resurgence in Covid-19 infections and hospitalizations.
"If it wasn't for the huge amount of savings people are sitting on from the pandemic, I'd be more worried," said Mike Bell, global market strategist at J.P. Morgan Asset Management. "The obvious risk to that is winter. I don't think anyone knows if that will lead to another pickup in cases and hospitalizations."
With no economic releases due on Columbus Day, and the U.S. bond market closed, analysts were left dissecting the report that showed 194,000 nonfarm jobs added in September.
"Friday's U.S. employment report was sufficiently mixed to revive the debate over the whether the Fed will really go ahead with the planned tapering next month.
Despite the headline miss, the underlying numbers should just about meet Chair Powell's requirement of 'decent' and ensure that the existing schedule remains intact," said Ian Williams, strategist at U.K. broker Peel Hunt.
He added that the upcoming third-quarter earnings season will be even more crucial in supporting valuations as yields rise. Major U.S. banks including JPMorgan Chase, Bank of America and Citigroup are due to report results this week. No major earnings are due Monday.
Overseas, the pan-continental Stoxx Europe 600 ticked down, with losses led by the travel and leisure sector. Stocks in Asia were mixed.
Forex:
The dollar should remain supported this week as the Fed stands ready to normalize monetary policy and as America's energy independence protects it from rising prices, ING said.
The dollar will rise particularly against energy importers and central banks that aren't prepared to react to higher prices, including Japan, ING analysts said.
USD/JPY is in the process of breaking above major resistance levels and could rise towards 115, they said.
"The DXY is consolidating below some major resistance at 94.50/70, but upside pressure should remain in place all week." USD/JPY rose 0.7% to 112.965, its highest level since December 2018, according to FactSet.
Sterling may rise in the next couple of months on the prospect of the Bank of England raising interest rates soon but could fall thereafter on concerns about policy error, Commerzbank said.
If the market were to consider monetary policy tightening as a mistake, the "GBP-positive effect could soon be turned on its head," Commerzbank currency analyst Ulrich Leuchtmann said.
Many economists argue that a central bank shouldn't take action when inflation is being driven by labor shortages that tighter policy can't resolve, he said.
Bitcoin added to recent gains, rising almost 1.9% from its Sunday 5 p.m. ET level to $56,449.87. Speculation has been mounting that the Securities and Exchange Commission will approve a bitcoin futures exchange-traded fund in coming weeks, which could increase the number of firms able to gain exposure to the cryptocurrency.
Bonds:
Bond markets were closed for a federal holiday. Payrolls data, albeit weaker than expected for September, was probably not small enough to stop the Fed from tapering in November, said Joseph Marlow, assistant economist at Capital Economics.
"Although we would not expect a tapering announcement to have much impact on yields--in 2013, the majority of the volatility in the bond market occurred prior to the official announcement and an announcement this time around is already widely anticipated--we do think that a gradual reduction in the central bank's asset purchases over time would remove an obstacle to even higher Treasury yields," he said.
Capital Economics forecasts the 10-year U.S. Treasury yield will reach 2.5% by the end of 2023.
With the recent repricing, markets are essentially testing the European Central Bank's transitory inflation narrative, said Piet Haines Christiansen, chief strategist for ECB and EUR fixed income at Danske Bank. His base case is still for transitory inflation, though, he said.
The big unknown that still needs to see is underlying inflation, driven by wages, he said. "For ECB to react to inflation coming, we should still see underlying inflation and wages pick up (negotiated wages are crucial to follow)," he said.
The ECB is unlikely to tighten monetary policy if inflation spikes because of supply issues or energy prices, he said.
Commodities:
Oil prices rose, with U.S. futures pushing back above $80 a barrel after briefly breaching that level on Friday for the first time since 2014. "Power concerns continue to offer support to the oil market," said ING's Warren Patterson, pointing to growing levels of gas-to-oil switching.
WTI investors seem to be confident of further gains, with managed money last week increasing their bets on rising prices to their largest position since July.
With China back from its public holiday, Beijing is pushing coal mines to increase output, but Patterson noted that heavy rains in Shanxi province have forced some mine closures. That could also feed through to oil prices.
European benchmark natural-gas prices were up 5% a megawatt hour, with the ascent of prices having slowed since Russian officials last week hinted at increased supply to Europe from November.
Despite that, prices still remain elevated, ING's Warren Patterson said. He pointed to the latest data from Gas Infrastructure Europe showing that gas storage in the continent is slightly more than 76% full at the moment, compared with a five-year average for this time of year of almost 91%.
LME three-month copper futures were up 1.4% at $9,483.50 a metric ton, with industrial metals moving higher across the board.
Those moves come as the U.S. dollar slips after U.S. job growth fell to the slowest pace of the year in September, with the Delta variant and worker shortages weighing on the economic recovery. A weaker dollar tends to make dollar-denominated commodities like copper less expensive for other currency holders.
That currency moves and renewed demand from China -- on its return from its public holiday -- are spurring metals prices higher, according to Marex Spectron. London gold was down with its post-jobs rally faltering on rising risk appetite in Asian equity markets said OANDA's Jeffrey Halley.
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(MORE TO FOLLOW) Dow Jones Newswires
10-11-21 0607ET
