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Inside the Broker - Non-Farm Payrolls round off the week

Inside the Broker

Non-Farm Payrolls round off the week

We get the latest update on US Non-Farm Payrolls this Friday, after which things should be quiet until the Jackson Hole Economic Symposium kicks off on Thursday 26th August. That’s not to say there aren’t any important economic data releases in the meantime. There’s the US Consumer Price Index and Producer Prices next week, and Retail Sales and minutes of the last FOMC meeting the week after. And let’s not forget that we’re in the middle of the second quarter earnings season. But Payrolls and Jackson Hole certainly bookend this main summer month. Bear in mind, while trading volumes may be lower over the holiday season, this can lead to increased market volatility.

Another positive month

All the major US indices made decent gains in July. The Dow was up 1.2%, the NASDAQ 100 ended 2.8% higher and the S&P 500 rose 2.3%. This means that both the Dow Jones Industrial Average and the S&P 500 have risen for six consecutive months. But it wasn’t all plain sailing. There were jitters after the Chinese authorities clamped down on tech and education companies. This led to a sell-off in some of China’s most high-profile corporations, leading some analysts to warn investors to give Chinese stocks, even those quoted on US exchanges, a wide birth. The Robinhood IPO also got off to a shaky start as the stock fell over 10% soon after its launch at $38 per share. It’s currently 5% below its issue price.

Mixed reaction to tech earnings

Last week saw the big six US tech companies release their latest earnings updates. Tesla, Alphabet (Google’s parent company), Apple, Microsoft and Facebook all beat expectations on revenues and guidance. Despite this, their weekly performance was mixed. Tesla fell initially after it warned on chip shortage worries, but ended higher for the week, as did Alphabet. Apple closed out the week in negative territory as CEO Tim Cook also warned of chip shortage which could impact future iPhone production. Microsoft also ended the week lower, but this followed on from a strong rally in the previous week which took the stock to a record high. Facebook beat earnings expectations but warned of a significant growth slowdown. Its stock ended the week sharply lower, although like Microsoft, it was pulling back from record highs. Finally, Amazon rounded off the tech earnings season by posting its first revenue miss in three years. The stock fell more than 7% as it also issued disappointing forward guidance. Nevertheless, the NASDAQ ended up on the month and within shouting distance of its record closing high hit at the beginning of last week.

The season continues

This is another big earnings week with more than a quarter of S&P 500 companies due to report, including Alibaba, General Motors, Kraft Heinz, Uber, Fox Corporation, Roku, Cardinal Health, ViacomCBS, Duke Energy, Moderna, Square, Shake Shack and Virgin Galactic. Of the 59% of S&P 500 companies that have reported so far, 88% have beaten consensus expectations on both earnings per share and revenues, according to data provided by FactSet. This is helping to keep a floor under the major indices, as is the Federal Reserve. Last week the US central bank released its latest statement on monetary policy. As expected, there was no change in the key fed funds interest rate. They reported that the economy was continuing to improve despite pandemic concerns, and that they still consider the increase in inflation to be transitory. That was borne out to some degree by a modest drop in Core PCE growth from the previous month. In his subsequent press conference, Fed Chair Jerome Powell made it clear that it was too early to consider tapering the central bank’s bond purchase programme as the economic recovery remains uneven, with a considerable amount of work to do to get unemployment back down to pre-pandemic levels. Consequently, the focus is firmly on the latest Non-Farm Payroll report which comes out this Friday. While the numbers could change over the next few days, particularly if we have a surprise result from Wednesday’s ADP Payroll report, the current consensus estimate is for jobs gains of 895,000 in July. If so, this would be the highest reading since the 1.49 million payroll number from August last year. Once again, there are concerns that an unexpectedly large number, say anything above 1 million, could trigger a sell-off in equities and other risk assets. The thinking behind this is that strong payroll data, which has been trending upwards over the past few months, will force the Federal Reserve to consider tightening monetary policy earlier than currently forecast. If so, that would remove one of the key foundation blocks supporting the current stock market rally.

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