After a rather eventless 24 hours of trading, today is NFP Friday and volatility is bound to pick up again as investors are looking towards the US jobs report. With the major currencies going nowhere yesterday and the US markets closed in light of the July 4th celebrations, today’s figures are considered key in dictating the price action going forward. Clearly, the main takeaway from the NFPs will be the repercussions on the Fed’s conviction in cutting rates at the end of the month. And, given the significance of the report in that regard both the Dollar and equities have a lot to gain - or lose - from the way the data prints.
As everyone knows by now, the Fed is expected to cut interest rates during their July FOMC meeting as a response to the slowdown in the domestic market. Or at least that’s what market participants are expecting, as seen by the way the Dollar and the stock markets have been trading ever since Jerome Powell opened the door for fresh easing ahead. However, the head of the Fed has also said that the US central bank monitors both the health of the domestic economy and the external risk factors affecting its growth potential before making a decision.
And starting from the latter, it is clear that Powell was referring to the US-China trade war and whether the dispute between the two countries would deteriorate as the US was threatening additional tariffs before the G-20 meeting. However, the high-level sit-down in Osaka resulted in Trump revoking his threat for now and the two sides restarting negotiations - not the best outcome as the existing levies remain in place but also not a deterioration. So, in that regard the Fed has one less reason to act immediately.
Now, in regards to the health of the domestic market, it is obvious that the US economy has been seeing widespread weakness across several sectors. As a response, the Fed has said that they monitor the incoming data and are ready to act if things become worse but the recent string of reports has been rather mixed, which brings us to today’s NFP reading. It is important to remember here that the US central bank doesn’t react to singular data prints but rather monitors the broader trends. As such and keeping in mind that Powell recently said that he’s watching the three-month average rate of payroll growth, today’s printing is quite crucial but also requires a specific way to be read.
Despite last month’s disappointing 75k reading, the three-month average advanced to 155k from 144k last time around, indicating a positive trend in place. This means that the headline number about to be released today will either push this average higher or send it back down again and this is what will be key in shaping the Fed’s outlook, not the singular reading itself. With economists estimating that 160k jobs were added in the economy last month, any number around this figure - or slightly higher - would mean that the rate of growth will remain positive, even though the headline figure won’t be anywhere close to what many would consider exciting. To sum this up, a mere confirmation of economists’ expectations will be enough to dictate a positive takeaway and, should this happen, it won’t not be good news for those betting in favor of the Fed pulling the trigger at the end of the month.
Barring a significant drop in wage growth, a 160k reading could allow the Fed to stay put for now and delay cutting rates at this instance - or at least that’s what investors will deduce. This will help the Dollar rally higher, driving the Dollar/Yen rate above 108 and en-route to 109, push the higher beta currencies like the Euro and the Pound lower and quite likely force equities to correct in a hurry - given that their recent bullish bias has been fueled by elevated rate cuts expectations. Of course in the opposite case, another miss in the report will solidify the calls for an immediate reduction in the interest rates, which will doom the greenback to continued weakness and send equities to new highs.
Meanwhile, the stakes are high for Gold as well as the yellow metal’s direction also hinges on the rate cut odds. Prices have pulled back again and are now trading around the $1,420 area and, depending on what the takeaway from the NFP report is today, we should see quite a reaction from Gold. If the NFPs miss, the level to watch on the upside is the $1,440 barrier which, if penetrated, could open the door for a move towards $1,460. Otherwise, a fresh leg higher for the Dollar on the back of a robust NFP reading would drive prices towards the $1,400 area again.
Finally, equities will also take their cue from the US jobs report. Yesterday Europe was flat and with the US markets closed investors were focusing on the upcoming release from the States. As we mentioned above, equities have seen a positive bias over the past few sessions as the odds for an easier monetary policy ahead have been mounting. However, should the NFPs indicate a robust jobs market then the likelihood of an immediate rate cut could diminish and stop the rally in its tracks.
MARKET EVENTS TO WATCH
- US Non-Farm Payrolls - 4.30pm
- US Average Hourly Earnings - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research