Market participants are getting ahead of themselves in terms of the Fed monetary policy, the upcoming US NFP data may provide them some reality check
European trading action is expected to remain reticent today as the biggest market in the world, the US, is closed to celebrate the 4th of July. Trading over in Asia has also been somewhat quiet as traders await the next action by the Federal Reserve. Of course, the market expectations are that the Fed is likely to make a U-turn with respect to their monetary policy. There is no doubt that everything is very much data dependent and the Fed has made this clear from day one, and it is in this essence, that this week’s economic numbers are of significant importance.
Yesterday, the US payroll economic numbers increased less than the market expectations. The US Private payroll number increased nearly 102K while the market expectations were 135K. This number sets the stage for the mother of all data, the US NFP (which matter the most for the Fed). Looking at economic numbers released so far, the short bets on the dollar index have eased off, despite the fact that the market isn’t expecting a solid number at all on Friday.
The Fed cannot afford any kind of economic risk to the economy. It will derail all the hard work done by them. We have strong evidence for the economic recovery to halt if there is no help provided by the Fed.
Having said this, there is always an argument that how the economy can stall when the stock market has been hitting record. Well, the stock market has been running on something which I call “Hopium”- there is just a lot of hope among traders that the Fed is going to be aggressive in cutting the interest rate in order to provide that extra help.
This is mainly due to the difference in expectation between the Fed and market. The market is also more optimistic in relation to the upcoming dovish monetary policy members because president Trump is determined to push two more new members (of his choice) in the Federal Reserve committee who will help to shape the dovish monetary policy. Christopher Waller and Judy Shelton are the top choices by the president as per his recent tweet.
Going back to the main agenda, the US NFP data (due tomorrow), the payroll growth for this year has seen a major downtrend, currently sitting at 17 month low of 174.5K. on the flip side, the ISM manufacturing data for the month June, another important indicator for the US NFP, confirmed that the employment index isn’t under s major threat. It rose to 54.5 in June and touched three month high. The index is now above the 6-month average. The recent data from the Fed Beige Book suggest strong employment growth and the labour market is also tight. In addition to this, the NFIB survey says that a large number of firms cannot fill in the jobs mainly due to shortage of workers with right skills.
Furthermore, the labour participation rate is at 62.8%, and the hope is that new workers will enter into the job market due to the rising wage growth. However, the evidence to support this argument hasn't proven its track record for some time now.
From a trading perspective, it will be worth keeping an eye on the gold price. Since 30th May, it has been rising sharply and ever since we have not seen the price turning back (with the exceptions of a few retracements which have proven themselves a healthy opportunity to join the trend).
If the upcoming US NFP headline number stays above the 130K, it means that the jobs market is robust. Firms outside the manufacturing department are keen to recruit more workers and this mean the wage growth may continue to grind higher. The average hourly number is expected to rise from 0.2% to 0.3% and the unemployment number is expected to rise.
The combination of the above is likely to push the Fed’s hand to introduce an interest cut in July and this could be 25 basis points. As long as the gold price stays above the 1380 mark, the long term trend will remain intact.