Will NFP disappoint amid Fed rate hikes?

The news shaping the markets today

French President Emmanuel Macron said European nations would send more military gear to Ukraine in its ongoing war with Russia, which sent the WTI crude oil prices slightly higher this morning.

Japan’s household spending grew by 5.1% from the previous year in August, following a 3.4% increase in the previous month. This being the third straight month of gains in the country’s personal consumption lent support to the JPY/USD forex pair.

South Korea posted a current account deficit of $3.05 billion in August, versus a surplus of $0.79 billion in the previous month. However, the KRW/USD pair rose slightly in forex trading this morning.

China’s foreign exchange reserves contracted by $26 billion to $3.029 trillion in September, reaching the lowest level since March 2017. However, the figure was still higher than the consensus estimate of $3 trillion. The CNY/USD forex pair remained broadly flat on the news.

Philippines’ manufacturing production rose by 11.0% year-over-year in August, following a 10.6% increase a month ago. Despite this being the 16th consecutive month of growth in manufacturing output, the PHP/USD pair declined in forex trading this morning.

What’s happening: The US Bureau of Labor Statistics is all set to report September jobs data on Friday, October 7 at 830 am ET (1230 pm GMT).

What happened: Jobs growth in the US economy in September is widely expected to soften amid a series of interest rate hikes by the Federal Reserve.

However, the leading indicators suggest that the expectations may prove to be too high.

What are expectations:

• Nonfarm payrolls are expected to increase by 260,000 in September, following a 315,000 gain in the previous month.
• Analysts on average expect the unemployment rate to remain unchanged at 3.7%.
• Average hourly earnings are projected to rise 0.3% month-over-month, following a 0.3% increase in August.

Why it matters: The US economy added 315,000 payrolls in August, versus a 526,000 gain in July. The numbers came in roughly in line with expectations, signalling broad-based hiring across several sectors. However, the current state of the US labour market remains more uncertain than usual owing to the Fed’s aggressive monetary policy.

Some of the leading indicators, including jobless claims, ADP, ISM manufacturing and services data, are considered when predicting NFP data. The ISM services PMI employment component improved to 53.0 in September, from 50.2 in the previous month, while the ISM manufacturing PMI employment component declined to 48.7, from the previous month’s reading of 54.2, moving back to the contraction zone.

The four-week moving average of initial jobless claims fell to 207,000, from 246,000 in August, while the ADP employment report came in at 208,000 in September, up from 185,000 in the previous month.

On Thursday, the US Labor Department reported an increase in the number of people filing for first-time jobless insurance. Initial jobless claims for the week ended October 1 rose sharply to 219,000, after falling to a five-month low of 193,000 in the prior week.

The leading indicators signal some softening of the NFP data for September. However, expectations have not softened enough, with the consensus estimate showing an addition of 260,000 jobs. If the expected gain materialises, it would be much higher than the average range of 150,000-200,000 before the pandemic, while still representing a cool-off from August’s print of 315,000.

What to watch: The release of the jobs report typically impacts stock and forex markets around the world. US stock markets began the week with sharp gains, while the US dollar index has pulled back after climbing to over a 20-year high in late September.

The US Federal Reserve will also monitor the jobs report to decide its next move, although policymakers have indicated continued rate hikes till some stability in prices is seen. The Consumer Price Index accelerated at an annual rate of 8.3% in August, much higher than the Fed’s target of 2%.

The markets today

The British pound will be in focus today ahead of a couple of major economic reports

Context: Sentiment for the sterling was hit by a downgrade by Fitch Ratings.

Details: The British pound was under pressure through September, declining around 3.9% the country’s new government, led by PM Liz Truss, announced tax cut plans.

UK Chancellor Kwasi Kwarteng announced a mini-budget last month, which raised several concerns. Kwarteng withdrew the tax breaks for higher earners following immense pressure. However, PM Truss backed the government’s tax cut plan at the Conservative Party’s latest conference.

Leading rating agency, Fitch Ratings cut its outlook for British debt to “Negative” from “Stable.” This followed a similar move by Standard & Poor’s, which reduced its rating saying that PM Truss’s tax cut plans would cause debt in the UK to keep rising.

Investors did not add pounds to their portfolios even with some positive economic data. The S&P Global/CIPS construction PMI for the UK improved to 52.3 in September, from 49.2 a month ago. The figure not only showed a move back into the expansion zone but also topped the consensus estimate of 48.0.

The GBP/USD forex pair fell sharply to close at 1.1162 on Thursday. UK stocks declined for the second session in a row, taking the blue-chip FTSE 100 below the 7,000 level.

What to watch: Traders await the release of the house price index and labour productivity from the UK. The UK’s Halifax house price index, which increased 11.5% year-over-year in August, is expected to rise 11.1% in September. Analysts on average expect labour productivity in the UK to remain unchanged in the second quarter, following a 0.6% decline in the prior period.

Other Markets: US indices closed lower on Thursday, with the Dow Jones index, S&P 500 and Nasdaq 100 down by 1.15%, 1.02% and 0.76%, respectively.

Support & resistances for today

Market snapshot

What else to watch today

Germany’s industrial production, retail sales and import prices, South Africa’s foreign exchange reserves, France’s balance of trade, current account and foreign exchange reserves, Italy’s retail sales, Singapore’s foreign exchange reserves, Mexico’s consumer prices, India’s foreign exchange reserves, the value of deposits and value of loans, Brazil’s retail sales, car production and car registrations, Canada’s unemployment rate and employment change, Russia’s foreign exchange reserves and consumer prices, US wholesale inventories, Baker Hughes crude oil rigs, total vehicle sales and consumer credit, as well as Turkey’s treasury cash balance.