Marketmind: Next up, payrolls

[August 04, 2023]  A look at the day ahead in U.S. and global markets by Yoruk Bahceli.

U.S. markets are reeling this week from surging funding needs, the loss of the government's prized triple-A credit rating and a still-hot labour market. Friday's crucial jobs data will provide another hurdle.

Longer-dated U.S. Treasuries have taken a beating this week, with 10-year and 30-year yields surging over 20 basis points, heading for their biggest weekly jump since late December.

In stark focus is the fiscal position of the world's biggest economy. Markets struggled to digest news that the Treasury expects to borrow $1.007 trillion in the third quarter, a record amount for that period and up $274 billion from May's estimate.

Fitch issued its surprise downgrade of the U.S. credit rating on Tuesday just as markets were looking ahead to a Treasury announcement setting the sizes of U.S. debt sales to reflect those surging borrowing needs.

That means the U.S. no longer holds a prized AAA rating on average. Fitch cited the deterioration in the United States' fiscal metrics as a reason for the downgrade. The financial community has been scrambling to understand what that might mean for the Treasury debt that underpins the global financial system as an unrivalled safe-haven asset.

Data this week is still pointing to a hot labour market, which has given yields an extra push higher.

U.S. job openings, though falling, remain at levels consistent with a tight labour market, the ADP's national employment report showed strong private hiring last month that beat expectations and layoffs dropped to an 11-month low in July.

On Friday, if economists polled by Reuters are right, non-farm payrolls will have risen by 200,000 in July -- pretty much unchanged from June. The unemployment rate should also hold steady at 3.6%, while average earnings growth should slow.

An employee hiring sign with a QR code is seen in a window of a business in Arlington, Virginia, U.S., April 7, 2023. REUTERS/Elizabeth Frantz/File Photo

Citi for example said earlier in this week that the 290,000 upside surprise it expects along with higher-than-expected earnings could push yields even higher by raising the probability of a further rate hike from the Fed, or rates remaining higher for longer.

Traders are currently betting the Fed, which hiked rates to 5.25%-5.50% last week, is done for now and will deliver a first cut by May, but don't forget Fed boss Jerome Powell left his options open in July.

But ADP is often a misleading indicator. Just last month, another stronger-than-expected ADP report sent yields surging, only to be followed by a weaker-than-expected nonfarm payrolls report, stoking yield swings.

So, expect more volatility to dust off a week that turned out more eventful than anyone likely wanted for mid-summer.

Key developments that should provide more direction to U.S. markets later on Friday:

* U.S. July non-farm payrolls

* Canada July employment data

* Goodyear Tire earnings

(Reporting by Yoruk Bahceli; Editing by Christina Fincher)

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