Investors await NFP for cues to Fed rate hike

The news shaping the markets today

Russia is holding military exercises involving China and India amid rising tensions with the US. The news sent WTI crude oil prices higher this morning.

South Korea’s consumer prices rose by 5.7% year-over-year in August, easing from a 24-year high of 6.3% in July. The figure also came in below market expectations of 6.1%, lending support to the KRW/USD forex pair.

Brazil’s trade surplus narrowed to $4.2 billion in August, from $7.7 billion in the year-ago month. Although the latest reading surpassed the consensus estimate of $3.8 billion, the BRL/USD pair declined in forex trading this morning.

Canada’s building permits fell 6.6% to C$11.2 billion in June, versus a 1.5% decline in the previous month. The decline was much steeper than expectations of a 0.5% downturn, which exerted pressure on the CAD/USD forex pair.

Mexico’s manufacturing PMI came in unchanged at 48.5 in August. The latest reading signalled the second straight month of contraction in manufacturing activity and sent the MXN/USD pair lower in forex trading this morning.

What’s happening: The US Bureau of Labor Statistics is all set to release its all-important jobs data for August on Friday, September 2.

What happened: Last month’s NFP (nonfarm payrolls) report surpassed expectations, with an addition of more than half a million jobs.

However, analysts have projected an easing in jobs growth for August, which could impact the Federal Reserve’s interest rate decision at its meeting later this month.

Why it matters: The US economy added more than half a million jobs in July, which was the highest in five months, while the average hourly earnings rose 0.5% month-over-month.

Since the release of that report, Fed policymakers have indicated that the fight against inflation is not yet over and there could be aggressive rate hikes ahead. Traders widely expect the Fed to raise interest rates by another 75bps at its upcoming meeting this month, following hawkish remarks from Fed Chairman Jerome Powell at the Jackson Hole symposium.

The jobs report, scheduled for release later today, could prove material in confirming a 75bps rate hike, as the Fed considers the state of the labour market when making decisions around its monetary policy.

Better-than-expected jobs figures and solid wage growth could give the Fed the perfect environment to increase borrowing costs by another 75 basis points in mid-September. However, indications of softer job growth and any slowdown in average hourly wages may force the central bank to raise rates by only 50 bps.

Among the leading indicators that help predict the NFP report, the employment component of the ISM’s manufacturing PMI rose to 52.8 in August, from 49.9 in the previous month, moving back to the positive zone. However, another leading indicator, the four-week moving average of initial jobless claims, slipped to 247,000. The revised ADP employment report came in well below market expectations, at 132,000 for August.

What are the estimates?

• The US economy is expected to add around 300,000 jobs in August, following a 528,000 add-in in July.
• The unemployment rate is projected to remain unchanged at 3.5% in August.
• Average hourly wages, which rose by 0.5% to $32.27 in July, are likely to rise just 0.3% in August.

What to watch: The release of the NFP report typically impacts both forex and equity markets around the world. Traders will also monitor the US dollar index, which surged through the latter half of August with the Federal Reserve maintaining a hawkish stance.

The markets today

European stocks will be in focus today ahead of producer price inflation data

Context: European markets started September on a negative note after recording losses last month.

Details: Traders shorted European stocks on Thursday amid concerns about interest rate hikes by the ECB.

Markets had already been cautious since last Friday, following hawkish comments from Federal Reserve chief Jerome Powell.

On the economic data front, PMIs for most European countries showed a contraction in factory activity for August. The only main exception was France. The S&P Global manufacturing PMI for the country improved to 50.6 in August, from 49.5 a month ago and came in above the preliminary reading of 49.

The S&P Global manufacturing PMI for Eurozone was revised lower to 49.6 in August, versus a preliminary estimate of 49.7. The unemployment rate in the region slipped to a record low of 6.6% in July, from 6.7% in the earlier month.

Germany’s retail sales came in better than expectations, growing by 1.9% in July. This represented a meaningful recovery from the 1.5% decline in the previous month and easily topped market expectations of a flat reading.

The pan-European Stoxx 600 fell 1.8% to close at 407.66 on Thursday, with all major sectors closing in the negative zone. Travel and leisure stocks were among the worst performers, shedding close to 4% in the session.

London’s FTSE 100 dipped 1.86% to settle at 7,148.50, while the DAX 40 and CAC 40 lost 1.60% and 1.48%, respectively.

What to watch: Traders await the release of producer price inflation data from the Eurozone today. Producer prices in the region had increased 1.1% in June and are expected to accelerate to 2.8% in August. The release of the US NFP report will also remain in focus.

Other Markets: US indices closed mostly higher on Thursday, with the Dow Jones index, S&P 500 and Nasdaq 100 up by 0.46%, 0.30% and 0.02%, respectively.

Support & resistances for today

Market snapshot

What else to watch today

Germany’s balance of trade, France’s government budget value and new car registrations, Spain’s unemployment change, Brazil’s IPC-Fipe inflation and industrial production, Italy’s car registrations, Mexico’s foreign exchange reserves, India’s foreign exchange reserves, Canada’s labour productivity, US factory orders and Baker Hughes crude oil rigs, as well as Argentina’s tax revenue.