Investors looking to extend an Independence Day respite into the weekend might be in for a rude awakening on Friday.
It’s clear that “tomorrow is the key day of the week on both the data front, with the release of U.S. payrolls and on trade with the U.S. due to impose tariffs on China — with China reciprocating. As a result, the markets might trade with a bit of trepidation ahead of tomorrow and that could keep a bit of risk-off bias in play,” said Steven Barrow, currency and fixed-income strategist at Standard Bank, in a Thursday note.
Indeed, the stock market has been at the mercy of competing narratives. Fears that trade spats between the U.S. and its major trade partners could hit U.S. firms and knock global growth have been a negative, while signs the U.S. economy is picking up steam as well as continued expectations for solid earnings growth have helped equities remain resilient.
So far on Thursday, however, stocks were enjoying a modest boost, with the S&P 500 SPX, +0.76% up around 0.5% and the Dow Jones Industrial Average DJIA, +0.74% rising around 137 points, or 0.6%. U.S. financial markers were closed Wednesday for the Independence Day holiday. Gains were attributed in part to news reports that the U.S. and its European counterparts could move to ease tensions over automobiles.
The U.S. dollar, meanwhile, has seen its advance pause. The euro/dollar pair EURUSD, +0.2831% has remained in a tight trading range between $1.15 and $1.18 over the past month after retreating sharply from above $1.24 in mid-April, Barrow noted, observing that markets often see an extended consolidation phase after sharp moves.
The question, he said, is whether the U.S. currency is consolidating ahead of another rise or is at the start of a bearish turnaround.
The case for a turnaround, he said, would rest on the U.S. withdrawing tariff threats on Chinese goods or a signal from the Federal Reserve that policy makers are getting worried abut international developments. Either of those things could happen in the next 24 hours — minutes of the Fed’s June meeting are set for release at 2 p.m. Eastern Thursday, while the Trump administration could announce a last-minute reprieve on tariffs — but is “pretty unlikely,” he said.
So the question for investors is whether minutes that underline a “relatively hawkish” Fed stance and the formal introduction of pre-announced tariffs will spook the markets or whether investors will see them as perfectly well anticipated, he said, adding that the danger is that “Trump could take to the Tweetwaves over the weekend and threaten more tariffs against China — as he did when China first said it would retaliate.”
Trade concerns could also intrude on the jobs front, said Kathleen Brooks, research director at City Index, in a note.
“If there are signs that corporate hiring is slowing down due to the US/China trade spat then markets could have a harsh reaction,” she said.
In reality, it’s too early to tell if a disappointing private-sector payrolls figure from ADP earlier Thursday and a rise in first-time jobless claims are tariff-related, she said, but market sensitivity to the issue means a disappointing payrolls figure could spark a selloff in U.S. assets.
June nonfarm payrolls are expected to grow by 200,000, while the unemployment rate is forecast to remain unchanged at 3.8%, according to a MarketWatch survey of analysts. Average hourly earnings are expected to show a 0.3% rise. The report is set for release Friday at 8:30 a.m. Eastern.
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Brooks is also concerned about the potential fallout on the trade front — both on U.S. assets and on future economic data.
“It is hard to see how U.S. indices can stem losses, especially if China retaliates with tit for tat sanctions on U.S. goods this weekend. If Beijing does give as good as it gets from the U.S. then we could see a sharp drop in risk sentiment, which may impact July hiring in the U.S. and next month’s payrolls report,” she said.
She also sees a risk the payrolls report could underwhelm investors, though a figure larger than 220,000 could allow the dollar to regain traction and fuel a “mini recovery” for stocks, albeit with upside capped by trade-war fears.
