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A Deep Dive into the Volatile U.S. and Global Markets
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The U.S. markets have been experiencing a wild ride this week, grappling with a plethora of challenges including surging funding needs, the loss of the government’s prized triple-A credit rating, and a still-hot labor market. Adding to the mix, the crucial jobs data due on Friday will undoubtedly provide another hurdle for investors to navigate.
One of the key concerns gripping the market is the fiscal position of the world’s largest economy. The news that the Treasury expects to borrow a record $1.007 trillion in the third quarter has sent shockwaves throughout the markets. This amount is $274 billion higher than what was estimated in May. The revelation came just as markets were bracing for a Treasury announcement regarding the sizes of debt sales, with the aim to accommodate these soaring borrowing needs.
Furthermore, the recent surprise downgrade of the U.S. credit rating by Fitch has intensified worries. The United States, no longer holding an average AAA rating, suffered the downgrade due to the deterioration in its fiscal metrics. The implications of this downgrade for Treasury debt, a pillar of the global financial system and a trusted safe-haven asset, remain unclear, leaving the financial community scrambling for answers.
To complicate matters, recent data signals a hot labor market, fueling speculation and adding to market volatility. While U.S. job openings have declined, they still remain at levels consistent with a tight labor market. The ADP’s national employment report revealed strong private hiring last month, surpassing expectations. Additionally, layoffs dropped to an 11-month low in July.
On Friday, if analysts polled by ANBLE are correct, non-farm payrolls are expected to have increased by 200,000 in July, which is roughly unchanged from June. The unemployment rate is anticipated to hold steady at 3.6%, while average earnings growth is projected to slow.
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Anticipating these numbers, Citi, for example, suggests that an upside surprise of 290,000 jobs, coupled with higher-than-expected earnings, could push yields even higher. This would raise the probability of a further rate hike from the Fed or potentially indicate that rates will remain elevated for an extended period.
Currently, traders are betting that the Federal Reserve, having recently hiked rates, has reached its maximum for now. However, it is worth remembering that Fed Chairman Jerome Powell left the door open to further rate adjustments in July.
It is important to exercise caution when interpreting the ADP report, as it has been misleading in the past. Last month, a stronger-than-expected ADP report caused yields to surge, only to be followed by a weaker-than-expected non-farm payrolls report, resulting in significant yield fluctuations.
As investors brace themselves for more uncertainty, it is clear that this week has proven to be much more eventful than anyone expected for mid-summer. Looking ahead, several key developments are expected to influence the U.S. markets:
- U.S. July non-farm payrolls
- Canada July employment data
- Goodyear Tire earnings
Navigating the current market turbulence requires careful analysis and constant monitoring of the unfolding events. While investors remain on edge, staying informed and adaptable will certainly be key to weathering the storm.
