It is that time of the month again!
The first Friday of the new month means the US Bureau of Labor Statistics will publish its closely-watched nonfarm payrolls report today. With Jerome Powell and several other Fed officials more or less confirming that tapering QE could start before the end of the year, investors are speculating that the US central bank may announce the timeline of the process at the FOMC’s November meeting. Until then, the Fed will have three more jobs reports to consider before publishing its plans. As such, today’s jobs report will be scrutinised very closely by the markets, and we may very well see some big moves in reaction to the data.
Now the market has had enough time to digest the Fed’s slow build up to the eventual reduction of QE. This means that tapering QE is no longer going to surprise the market, at least not in a meaningful way anyway. The Fed has also been very clear that interest rates will not necessarily rise immediately after tapering is completed.
What the markets will want to know next is not necessarily when tapering QE would commence but how fast it will be. This will be influenced directly by incoming macro data from the world’s largest economy, as well as inflation indication from around the world, such as any sharp changes in crude and gas prices, or container shipping rates etc.
- Economists are expecting a headline NFP print of 750K for August, which would represent a sizeable decrease from 900K+ readings in the previous two months.
- Unemployment rate is expected to have declined to 5.2% from 5.4% previously.
- Average hourly earnings are expected to rise 0.3% month-on-month, after climbing 0.4% the month before.
NFP leading indicators
This week’s leading indicators for NFP have been mostly weaker, although the key ISM services PMI employment component will not be published until after the jobs report is out. This makes it even harder to predict the payrolls figure for this month.
- ADP 374K vs. 640K expected and 326K last
- ISM manufacturing PMI Employment: 49.0 vs. 52.9 last (-3.9)
- Jobless claims: the 4-week average of initial claims dropped to 355K from 394K last
Overall, the indicators point to weakness in employment, and so we could see a disappointment this time around. Indeed, BMO Capital Markets are not very optimistic at all on the jobs report. According to their economists: "Anecdotes for the August jobs numbers are troubling with eight negative proxies and three positive ones." If they are correct, we could see the dollar slump.
NFP trade ideas
So, if the data turns out to be very weak, then investors will probably sell the dollar hard against the likes of the euro, which has benefited from surprising strength in Eurozone data of late. Gold and silver also come to mind.
If NFP and wages data come in around expectations, then don’t expect too much movements in the markets.
However, if Friday’s employment report comes in hotter than expected, then this will further cement tapering expectations and may lead to a mild bounce for the dollar. We would favour looking for long USD/JPY trades in this scenario.
Join us for a 30-minute webinar before the release of the US Non-Farm Payroll report. We will review some of the pre-NFP leading indicators to determine an estimate for headline jobs number and discuss how US dollar, gold and indices might react depending on the outcome of the jobs and wages data. We will also highlight key levels to watch and provide actionable trade ideas ahead of the NFP report. Click HERE
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