US yields will fall
The dollar started the week on a weaker footing, however, there is a high chance that the bearish pressure will ease as we approach Friday. At last week's meeting, the Fed left the door open to rumors of a hawkish policy shift in August and the key missing piece that could increase the likelihood of such an outcome was the upside surprise in this Friday's NFP report.
The number of new jobs created in the economy (aka Payroll) has been in the limelight in the post-pandemic period in terms of impact on Fed decisions. Expected to post a decent 900K gain. A stronger-than-expected Payrolls reading is likely to fuel speculation that the Fed will hint about a QE cut during the Jackson Hole Conference in August. In this case, the market will start to consider a decrease in demand in the Treasury market (as a result of the slowdown in Fed purchases), and given the passage of Biden's infrastructure plan, which will be financed with new debt, investors may start to exit Treasuries. en masse.
Recall that long-term Treasuries saw a strong rise in demand over the past two months (yield-to-maturity fell from 1.75% to 1.20%), however, there was no weakening of global economic expansion, or increased risk of COVID-10, which is referred to as the main catalyst of the movie, did not begin to materialize. According to JP Morgan, investors continue to adjust the bearish narrative into a Treasury bond rally similar to the situation when they explained the Treasury sell-off caused by the actual rebalancing of Japanese investors before the end of the fiscal year (when the 10-year Treasury yield rose from 1.0% to 1.75% in 1Q) by sharply rising inflation expectations and increasing risks of an overheated economy. Investment banks point to an interesting fact that the recent slump in bond yields was not accompanied by an increase in open interest in Treasury futures, that is, investors did not make new bets on the deteriorating economic situation, but only adjusted the previous one.
The sell-off in long-term Treasuries earlier this year was accompanied by a rebound in the dollar index from 89.5 to 93 points. A fresh wave of Treasury bond sales will likely also provide strong support to the dollar.
Preparations for this week's NFP report begin with today's ISM and Markit Manufacturing activity indexes. It will be interesting to see the dynamics of the employment and price sub-indices - the former will tell you what to expect from the NFP in the production sector, the second - whether the effects of delays and supply bottlenecks, as well as excessive strong demand, which slows down the economy, are dissipating. The main indicators of the report are expected to continue to improve, i. e. the expansion rate of activity in this sector remained positive in July. A weak report, in my opinion, will have a material impact on the market and will likely trigger more USD declines.
The ADP and non-manufacturing PMI reports from the ISM will be released Wednesday. This time the ADP set a more conservative job growth forecast - just 700K (versus 900K NFP). Also, keep an eye on the hiring component of the ISM index - last month was in the pressure zone and it is important to see a rebound to expect a strong NFP figure. The greenback is a risky asset that is expected to give a real reaction to the report's release.
