• Markets brace for another solid jobs report after strong ADP and ISM services PMI
• But dollar struggles to shine as rally in bond yields spreads globally
• Yen extends gains as stocks slip, gold sags but oil rebounds further

Risk appetite is in short supply on Friday ahead of the US nonfarm payrolls report later in the day after economic health gauges allayed heightened recession fears from earlier in the week but bolstered hawkish expectations of more tightening to come from the Fed and other major central banks.

The American economy continues to confound expectations of a slowdown despite major cracks appearing in some sectors such as manufacturing. The ADP employment report, which has a sketchy correlation with the official jobs data, yesterday showed private payrolls jumped by a staggering 497k in June.

Although the ADP and NFP prints have from time to time been out of sync with one another in the past, the data does nevertheless suggest that today’s payrolls number could come in well above the consensus forecast of 225k.

The ISM non-manufacturing PMI further supported the improving labour market picture in June as its employment component rose for the first time in three months. The headline PMI, meanwhile, also beat expectations, indicating that activity in the services sector was at its strongest since February.

With growing signs from the Fed that policymakers are more inclined to press the hike button than pause again even before these latest figures, investors are ramping up their bets of two rate increases in the coming months. Wednesday’s FOMC minutes did little to hide the fact that some officials were uncomfortable about skipping a hike in June.

The hawkish soundbites continued yesterday with comments from Dallas Fed President Lorie Logan who hinted that she’s not confident about how much additional tightening the lagged policy effects will provide.

However, the Fed has made significant progress on the inflation front even though underlying price measures remain somewhat elevated. The ISM’s prices paid indices for both manufacturing and non-manufacturing continued to decline in June. If today’s average earnings growth moderates slightly as forecast, it should keep a lid on more aggressive rate hike speculation.

But in the meantime, equity and bond markets have had a bit of a wakeup call as expectations that not just the Fed, but all the major central banks will have to do a lot more to rein in inflation got a major shot in the arm on Thursday. The two-year US Treasury yield hit the highest since 2007 and the 10-year is back near the pre-banking turmoil levels.

But European, Canadian and Australian yields have rallied too, making it difficult for the US dollar to capitalize much from the spike in Treasury yields. The dollar index is up only marginally over the week and would have risen even more if it wasn’t for the yen’s bounce back.

The Japanese currency has benefited from a combination of safe-haven flows as risk sentiment soured somewhat, as well as from fears of an imminent intervention by Japanese authorities in FX markets to support the flagging yen.

The Bank of Japan’s deputy governor, Shinichi Uchida, on Friday dampened speculation about a policy tweak as early as the July meeting. However, a pickup in Japanese wage growth in May to the highest since 1995 may have boosted bets that a policy shift is likely later in the year, adding to the yen’s upside today.

Equity markets fell on Thursday as bond yields surged across the board. But the selloff appears to be easing as US futures are only marginally in the red and European shares are mixed.

The jump in yields thwarted gold’s attempt at a rebound. The precious metal hit a low just above $1,900/oz yesterday, although it has managed to edge up today.

Oil futures on the other hand are headed for a second week of gains on the back of the OPEC+ decision to extend and deepen the supply cuts. In addition, the resilience of the US economy as well as further pledges from China that authorities are ready to implement supportive policies also likely lifted crude oil prices.