What has happened
The US jobs report last week caused some volatility in markets on Friday, however last week still saw many equity markets hit all-time highs. With the employment report released, all eyes this will be on the US CPI number which, despite higher numbers being shrugged off in recent months, remains a critical test for the equity narrative.
US jobs report
The US jobs report on Friday beat market expectations showing that 943,000 new jobs had been created in July versus expectations of 870,000. Last month’s reading was also revised up, meaning that the overall unemployment rate fell from 5.9% to 5.4%. Given the recent focus of Fed Chair Powell on the employment numbers, and specifically the breadth of the jobs recovery, the report had a significant impact on the US Treasury market. After comments from Clarida last week, the US 10-year Treasury had already risen significantly from its Wednesday levels and currently trades just shy of 1.3%. Earlier in the year there was concern that labour supply issues were holding back the recovery however with the headline unemployment rate falling by 0.5% over the month and demand for workers clearly evident, it was cyclical equities which rallied hardest in the aftermath of the report.
US CPI
The two biggest hurdles for equities at the moment are arguably the jobs report and the US inflation release. The US CPI figures come out on Wednesday with the economist consensus pointing a fall in the headline year on year rate from 5.4% to 5.3%, the core inflation figure (ex food and energy) is expected to fall slightly more, to 4.3% versus 4.5% last month. The recent beats have been driven, in large part, by the blockbuster gains in used cars and trucks and ‘lodging away from home’. There are some signs that the pressure within used cars is starting to fade but this may take several months to feed through to the CPI figures. Should the semiconductor shortage continue to ease, this will affect this sub-component as well as many others, albeit to a lesser degree.
What do we think
The US CPI number will be another test of US Treasury yields after a week of significant moves. Economists are expecting the inflationary impulse to start to flatten so any sign of significant continued momentum could lead to a questioning of the transitory inflation narrative and cause equities to stir from their summer slumber.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | 0.3% | 1.2% | 1.4% | 12.6% | |
| MSCI UK All Cap GBP | 0.0% | 1.5% | 2.0% | 13.9% | |
| MSCI USA GBP | 0.5% | 1.2% | 2.1% | 16.8% | |
| MSCI EMU GBP | 0.1% | 1.5% | 3.2% | 13.3% | |
| MSCI AC Asia ex Japan GBP | 0.1% | 1.6% | -2.8% | -1.7% | |
| MSCI Japan GBP | -0.1% | 1.4% | -1.0% | -0.3% | |
| MSCI Emerging Markets GBP | -0.1% | 1.4% | -2.3% | -0.1% | |
| MSCI AC World IT GBP | 0.1% | 1.7% | 2.8% | 15.7% | |
| MSCI AC World Healthcare GBP | -0.2% | 0.8% | 2.0% | 12.2% | |
| Barclays Sterling Gilts GBP | -1.1% | -0.4% | 0.9% | -3.5% | |
| Barclays Sterling Corps GBP | -0.7% | -0.2% | 0.4% | -1.4% | |
| WTI Oil GBP | -0.7% | -7.4% | -7.0% | 38.5% | |
| Dollar per Sterling | -0.4% | -0.2% | 0.6% | 1.5% | |
| Euro per Sterling | 0.2% | 0.7% | 1.4% | 5.5% | |
| MSCI PIMFA Income | 0.0% | 0.8% | 1.3% | 7.7% | |
| MSCI PIMFA Balanced | 0.0% | 0.9% | 1.4% | 8.9% | |
| MSCI PIMFA Growth | 0.1% | 1.1% | 1.5% | 11.0% | |
Source: Bloomberg as at 09/08/2021. TR denotes Net Total Return
