[Good Morning Market] US July Employment Surprise... Will August Market Volatility Increase?

Nonfarm Payrolls Increased by 943,000 in July
"Tapering May Become Visible if August Employment Indicators Remain Strong"

Korean Stock Market to Reflect Tapering Concerns and China's Movement Restrictions Impact

[Image source=EPA Yonhap News]

[Asia Economy Reporter Minji Lee] There are divided opinions on whether the U.S. July employment data, which significantly exceeded market expectations, will act as a positive or negative factor for the stock market. If the U.S. stock market reacts to employment, it is expected to face downward pressure due to tapering (asset purchase reduction) concerns. However, if it responds to the inflation data to be released on the 11th, it is expected to rise on relief that tapering may be delayed.

Sangyoung Seo, Researcher at Mirae Asset Securities: “The Fed’s hawkish stance has strengthened, and concerns over the spread of COVID-19 are also a burden.”

Last week, the U.S. stock market showed a clear improvement in employment, reflecting growing confidence in the economy. The U.S. nonfarm payrolls for July recorded 943,000, surpassing the market expectation of 900,000. The unemployment rate was 5.4%, lower than the expected 5.7%, and the labor force participation rate expanded to 61.7%.

This was influenced by increased wages and employment in some states ahead of the expiration of unemployment benefits. Accordingly, the Dow Jones Industrial Average rose 0.41% last weekend. However, the Nasdaq Composite fell 0.4%. This is because the Federal Reserve (Fed) places significant importance on employment in policy changes, raising concerns that a hawkish stance could be triggered.

However, the variable is COVID-19. Since mid-July, the number of new COVID-19 cases surged from a previous 7-day average of 30,000 to 100,000. To see if the Fed will change its policy, the August employment report to be released on the 3rd of next month must be examined.

Considering this, the domestic stock market is expected to experience high volatility as confidence in economic recovery from the clear improvement in U.S. employment clashes with the Fed’s hawkish stance. Additionally, the announcement of movement restrictions in Beijing and inflation data lower than market expectations are also expected to weigh on the stock market.

The July CPI (Consumer Price Index) to be released on the 11th is expected to increase by 5.3% year-on-year, slightly below the previous month’s 5.4%. Since the June CPI announcement, market volatility has increased, but this month it is expected to act as a positive factor. This is because inflationary pressures are not appearing, and the market is likely to interpret the data as dovish.

However, this is only a temporary reproduction of a positive atmosphere. This is because the strong July employment data is expected to materialize the market’s anticipation of a preemptive guidance through the September FOMC. If the August employment data to be released next month shows continuity, this expectation is likely to become reality.

It is also necessary to consider that the Fed stated at last month’s FOMC that it would take a considerable period to meet the conditions for tapering. This means that the better the employment data in the remaining second half of the year, the earlier the tapering timing could be. Employment data is expected to be a key factor determining the rise and fall of the U.S. stock market throughout the second half starting in August.

Following the Jackson Hole meeting at the end of August and the September FOMC, noise related to tapering is expected to be the biggest factor influencing the stock market flow in August and September. Therefore, the U.S. stock market in August is likely to enter a weak phase similar to past seasonal patterns. Furthermore, the weakness in August is expected to serve as a good energy accumulation period for the U.S. stock market to take a further leap in the fourth quarter.

Seungjin Shin, Researcher at Samsung Securities: “No concerns about peak out, focus on sectors with supplier dominance.”

Recently, the stock market has been characterized by sectoral rotation and sharp fluctuations, creating a situation where buying often leads to losses. When a sector surges following a theme, another sector’s rotation quickly follows, significantly lowering overall performance.

For example, last week saw sharp fluctuations in the semiconductor and steel sectors, which were more due to supply-demand issues than fundamental problems. These companies posted record earnings but still face peak out concerns. Such concerns have capped the upside of the index and created a rapid rotation cycle.

To avoid falling into this situation, portfolios should be built focusing on sectors without peak out concerns regarding growth, cyclical stocks with supplier pricing power, eco-friendly policy themes, and reopening beneficiaries in preparation for economic normalization in 2022. Momentum to focus on includes electric vehicle platforms, battery, and materials companies. On the 5th, President Biden announced a plan to have half of new car sales in the U.S. be eco-friendly vehicles by 2030. Considering that the penetration rate of pure electric vehicles in the new car market is currently around 2-3%, this is a very aggressive target. Expectations for the steel sector are also considered valid. Despite a significant correction last week, the supplier-dominant environment still prevails.

This content was produced with the assistance of AI translation services.