All eyes are on the US NFP number today and only a significant improvement in the average earnings number would improve the dollar position
Today is the most important day when we speak of the economic data. It is the U.S. NFP day, investors get to see the health of the U.S. labor market. This particular number has the capacity to set the trading tone for the rest of the month.
So, the question is how this number is going to influence the Dollar Index and the equity markets?
Well, to start with the U.S. equity markets, it is in decent shape. We have seen an astronomical performance for the major benchmark indices. Year-to-date, the S&P 500 index is up 14.86 percent, the Dow Jones 13.11 percent and the Nasdaq index is leading the way with a jaw-dropping gain of 18.94 percent.
There is no doubt that the gains in the equity markets are primarily due to the dovish stance adopted by the Fed chairman, Jerome Powell. Traders are feeling safe in pouring their money in the riskier assets because they know the Fed is on their side. There are little to no chances of the Fed raising the interest rates this year.
However, the Fed can alter its view fairly swiftly if the economic numbers continue to progress. Looking at the state of the U.S. economy, it doesn’t seem to me that the wheels are going to come off any time soon.
This particular week, we had a mixed bag of economic readings. Yes, there were some soft patches, but the final picture is still looking solid.
The dollar bears are betting for the dollar index to move lower and their thesis is based on the fact that there was a lot of softness in the U.S retail sales number, ISM non-manufacturing PMI & Core Durable order data. Having said this, the ISM non-manufacturing PMI number is firmly in the expansion territory, the reading was at 56.1. The number which distinguishes expansion and contraction is 50, a reading above 50 shows the economy is expanding and vice versa.
Nonetheless, major institutions are still of the mind frame, there is more weakness ahead for the dollar index. This week Morgan Stanley joined the bear camp as well. The bank thinks that the dollar index could fall as much as 6 percent by the end of this year.
It is in this essence that today’s US NFP has critical importance for investors. The forecast is for 172K and the previous reading was no short of a disaster, it came in at 20K. The average hourly earnings number is also expected to fall to 0.3 percent from the previous reading of 0.4 percent. I believe that if the headline number comes above the 200K, it would push the dollar index regardless of any other economic readings we have seen this week. If the jobs number falls below the 100K, it would firm the Fed’s dovish stance and it would mean more weakness for the dollar index.
However, it is imperative to keep in mind that when we are talking about the dollar index, it is all in relative perspective. Looking at the current economic and geopolitical situation over in the UK, the EU and Japan, it makes the US look like a much attractive place for investment. This particular reason is heavily ignored by the traders and this explains why we have not seen as much weakness in the dollar as it should be.
For instance, if we look at the YTD performance of gold, it is up only 0.56 percent and this is despite the fact that there is a huge difference in the Fed’s current stance as compared to what they were thinking at this time last year.
To conclude, only a substantial improvement in the average hourly earnings and U.S. NFP number would change the Fed’s current monetary policy stance. The dollar may drop if the numbers are weak, but it is important to keep in mind that the economic situation over in Europe is dire, the UK is facing the Brexit chaos, and the Bank of Japan is struggling to improve anything.