With the Fed meeting out of the way, the spotlight now falls on the next edition of nonfarm payrolls at 12:30 GMT Friday. It seems to have been a strong month for the jobs market, which continues to make progress towards full employment. Another solid employment report could solidify market pricing for the Fed to raise rates next summer and by extension, reactivate the dollar’s uptrend.
Slowdown, but don’t panic
The American economy hit a speed bump in the third quarter. This was when the Delta outbreak was running rampant through the country. With supply chains paralyzed as well, economic growth slowed down substantially.
On the bright side, this softness seems like an isolated phenomenon. Most of the data for the fourth quarter so far suggest the economic engine is up and running again, with PMI business surveys pointing to stronger growth ahead.
Better yet, Congress is about to deliver more spending. This has been a very slow process, and it may take a few more weeks, but it seems like it will get done. If both the infrastructure and the social spending bills pass, that could really power up the recovery.
Solid jobs report eyed
The labor market seems to have enjoyed a solid month in October. Nonfarm payrolls are projected at 450k, something that would push the unemployment rate down one tick to 4.7%. The catch is that the labor force participation rate remains muted, which artificially lowers the unemployment rate.
Wages are expected to have picked up too. Average hourly earnings are seen accelerating to 4.9% on a yearly basis from 4.6% previously, reflecting the tremendous inflationary pressures and the shortages of skilled staff that businesses are reporting.
As for the risks surrounding this report, most labor market indicators point to a positive surprise. The private ADP payrolls number clocked in at 571k, the Markit PMIs suggested that hiring picked up during the month, and jobless claims fell sharply during the NFP survey week. The only worrisome spot was the ISM services survey, which showed a slowdown in job creation.
Dollar looks better than rivals
In the FX arena, the US dollar has taken a breather lately but the overall picture remains encouraging. The American economy is already in better shape than Europe and China – which will likely take heavy damage from the energy crisis – and this lead could grow further if Congress delivers on its promises.
In turn, that implies inflation could remain scorching hot. Most of the spike in inflation so far was attributed to supply chain problems and energy prices going ballistic. But that seems to be changing.
Wages are already firing up and could accelerate further next year as the economy returns to full employment. Meanwhile, rents are starting to play catch-up with soaring housing prices. That’s not transitory. Judging by the powerful rally in inflation expectations, investors seem to share this view.
Therefore, the Fed might need to step on the brakes pretty aggressively. Markets are already pricing in two rate increases for next year, but the risk is that it delivers three. This spells upside risks for the dollar moving forward, especially against the currencies whose central banks will probably disappoint current market pricing – namely the Australian dollar, British pound, and euro.
Taking a technical look at euro/dollar, if the bears manage to pierce below the recent low of 1.1525, any further declines could encounter support near the 1.1420 barrier.
On the upside, the bulls would need to break above a congested region that encompasses the 1.1685 level, a downtrend line, and the 50-day moving average. If so, their next target could be the 1.1800 handle.
