Here is everything you need to know ahead of the nonfarm payrolls report
The markets have been relatively calm so far in today’s session after Thursday's big sell-off in US technology sector, with European indices and US index future trading higher along with crude and copper prices. The FX and gold markets were relatively quiet ahead of the publication of US nonfarm payrolls report at 13:30 BST. It remains to be seen whether there will be some follow-though in the selling when Wall Street reopens, as some of the indices have now bounced back to former support levels which were broken the day before.
What economists are expecting
Economists expect the jobs report will show 1.375 million nonfarm payrolls added to the economy last month, with the unemployment rate dropping below 10% for the first time since March at 9.8 per cent. In the past 4 months, the headline number has beaten expectations, but will this trend continue? As the ADP reported in midweek, private-sector payrolls increased by 428K, much weaker than 1250K expected in August. The employment components of the ISM manufacturing (46.4, up 2.1 from July) and services sector (47.9, up 5.8 from July) PMIs both remained below 50.0 but rose from the previous month. These pre-NFP indicators suggest companies hired at a more moderate pace than immediately following the lifting of lockdowns a few months ago.
How will the markets react?
You would think a lot would depend on this jobs report in so far as how stocks and the dollar will respond today. Normally, the employment report does impact the dollar in a big way. But since the pandemic, the reserve currency has become more sensitive to the “risk-on, risk-off” trade than macroeconomic data, because the Fed has said it will look through short-term volatility in data as the world’s largest economy tries to recover from the big recession. Individual data releases will not materially impact the direction of interest rates – unless a trend becomes apparent.
So, today’s jobs report will need to be seen from the viewpoint of the Fed’s policymakers. Unless it is very bad or very good, anything in-between is unlikely to cause too much of a reaction in the dollar. If it turns out to be much stronger than expected, it could calm the stock markets and trigger a “risk-on” response. This in turn may cause the Dollar Index to go down as investors potentially buy risk-sensitive currencies. Alternatively, a very poor jobs report will add to concerns that the recovery is already stalling, potentially triggering further weakness on Wall Street and in doing so the greenback may actually find support as risk-sensitive currencies are sold.
Source: TradingView.com and ThinkMarkets
Keep an eye on tech shares
In any case it is worth keep a close eye on the technology sector following the big sell-off on Thursday. The key question is this: where do we go from here? Thursday’s drop serves as a reminder that the markets can actually go down as well as up. Investors speculating on further gains for technology names will now have second thoughts about investing at these still-elevated levels. So, we may either see increased rotation into other sectors that have been lagging, meaning tech stocks will likely head into a period of consolidation, or see a proper correction. The latter scenario is what many people have been calling for given the growing disconnect between the markets and the economy. Yet every dip has so far been bought as central banks, and the Fed in particular, are determined to keep stocks elevated as doing so apparently causes a trickledown effect on the wider economy. Thus, while I wouldn’t be too surprised if this latest sell-off turns out to be short-lived like the previous occasions, Thursday’s technical damage certainly makes me think that at least some downside follow-through is warranted over the coming days especially as many companies remain fundamentally overvalued.
Source: TradingView.com and ThinkMarkets