Yields and Dollar surge after an Impressive NFP Report

The Fed will be pleased with this payroll report and will likely seek one more robust reading before announcing tapering at the September policy meeting. Yes, the Fed said the will continue to assess progress in the coming meetings, but if the unemployment rate falls to 5.1% before the September meeting, they could move earlier. The US labor market recovering is entering high gear after adding 943,000 jobs in July, a decent beat of the 870,000 consensus estimate. The range of estimates was wide, varying from 350,000 to 1.2 million jobs.

The Fed will be especially encouraged by the strong declines in both temporary layoffs and permanent job losses. Temporary layoffs declined by 572,000 to 1.2 million, while permanent job losses fell by 257,000 to 2.9 million (which is still above the 1.6 million seen in February 2020).

The unemployment rate improved to 5.4%, a beat of the 5.7% estimate, and very close to the 5.1% level which could be the level the Fed will need to see reached before formally announcing its taper plan.

Wall Street can now comfortably price in a taper start date before the end of the year, with an accelerated reduction of purchase finishing sometime next summer.

Inside the NFP Report

The bar was set very high today and economy delivered. Leisure and hospitality jobs increased by 380,000. More money is coming into the economy as wages and hours work rise, but inflationary fears might be easing given its lower paying jobs.

No one will really focus on seasonal factors, but it is important to note that the report stated that “staffing fluctuations in education due to the pandemic have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in July.”

Stocks

US stocks are mixed following an impressive jobs report that triggered a return of the reopening trade and alleviated some inflationary concerns. The Russell 2000 index was the outperformer given the buying spree of reopening stocks. The Nasdaq turned underperformed given the surge in Treasury yields, while the S&P 500 barely held onto gains.

FX/Treasuries

The dollar is surging following a better-than-expected nonfarm payroll report which may have paved the way for the Fed to announce tapering if the economy delivers one more robust report in September. The steepener trade is back as Treasury yields soar higher. The 10-year Treasury yield seems destined for 1.30%, with further upside likely targeting 1.35% over the next week or two.

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