US jobs – Grinding stronger.
The US July jobs report came out pretty strong. NFPs increase 943k, beating 870k consensus, with a positive revision in June. Average earnings growth and unemployment also came strong, with the former touching 4% yoy, in a very strong bounce up from the lows reached in February. The composition of job gains also sends bullish signals: re-opening sectors accounted for a third of the gains, and under-employment among minorities tightened. This suggests a strong increase in low wages jobs, and hence good progress in the economic recovery and more pressure on wages and prices. The US economy still has 5.7mn jobs to add to close the gap vs February 2020, of which a third in re-opening sectors. At this pace of job creation, it takes 1-2 job reports for labour markets to start looking tight. The reports corroborates our view that the Fed will soon need to turn decisively more hawkish.

Rates – Back at lows.
Despite the strong signal coming from the economy, rates are back to stagnation levels. European rates are just 10bp away 2020 lows, with BTPs at 55bp, Spain and Portugal close to 0, and bunds 50bp negative. Treasuries are somewhat higher in nominal terms, but 50bp off March highs and well negative in real terms. In fact, US real yields vs forward inflation have never been so low. A strict economic interpretation of the tightening would suggest the bond market is pricing a slowdown in 2H21. This is well at odds with the signals we receive elsewhere. Global ISM and PMIs remain at expansionary levels, US jobs data stay strong, China data are less worrisome than fears, and cyclical equity markets turned wobblier but are far from pricing a stagnation. In fact we believe flow factors, such as the strong US savings overhang and summer scarce supply, are at the root of tightening more than economic factors. Levels in the long-end seem to be getting too low for the Fed too, despite the recent dovish tone. In an interview this week, Fed Vice Chair Richard Clarida pointed at US yields as too low, and hinted at a potential taper announcement. With both China and delta variant turning an ever smaller threat to global recovery, we see a turnaround in rates likely in the next 1-2 months. We continue to stay cautious on carry trades and look for opportunities to add protection in global rates.

Covid – Delta goes East.
In China, the focus has moved from government economic policy to the delta variant. Local press reports multiple closures in 50 cities across the country, and Wuhan has resumed mass testing. The resurgence in China cases added some concerns in the markets, especially after the uncertainty on growth and policy that characterised the past few weeks. While the information we get is by its nature opaque, we maintain a broadly constructive view. First, vaccinations have accelerated locally, though the level stays low, and Sinovac efficacy is relatively high against severe cases. Second, both export and activity data for 2Q surprised on the upside, suggesting investors concerns on the ongoing “slowdown” are misplaced. Finally, Chinese authorities exhibited a very cautious attitude during the first wave too, so the situation is less likely to escalate than in US or Europe. We remain relatively positive on the global recovery. We continue to think most of the uncertainties from China will come from policy rather than Covid.

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