It is that time of the month again!
The closely-watched nonfarm payrolls report will be published today. With Jerome Powell and several other Fed officials more or less confirming that tapering QE could start before the end of the year amid surging inflationary pressures, investors are speculating that the US central bank may announce the timeline of the process at the FOMC’s November meeting. As that meeting will take place on November 3, it will come 2 days before the next jobs report is published. Therefore, today’s jobs report is the last one for Fed officials to consider before publishing their tapering plans. As such, it will be scrutinised very closely by markets participants, and we may very well see some big moves in reaction to the data – especially if the numbers deviate significantly from expectations.
If we see a set of numbers that come in around or well above forecasts, then it will more or less cement those tapering expectations. Even if the data disappoints slightly, I can’t imagine the Fed walking back on its plans to taper QE. However, if the jobs data come in significantly weaker than expectations – perhaps less than 100K – that could see the Fed wait until December.
But analyst expectations are quite high at 490K for the headline jobs growth while the average hourly earnings figure is expected to rise 0.4% month-on-month.
The market has had enough time to digest the Fed’s slow build up to the eventual reduction of QE. This means that tapering QE is no longer going to surprise the market, at least not in a meaningful way anyway. The Fed has also been very clear that interest rates will not necessarily rise immediately after tapering is completed, around the middle of next year. However, with surging inflationary pressures surprising even the Fed, the market has been pushing yields and expectations about policy tightening higher.
What the markets will want to know next is not necessarily when tapering QE would commence but how fast it will be. This will be influenced directly by incoming macro data from the world’s largest economy, as well as inflation metrics from around the world. The ongoing energy crisis is certainly a major problem facing many governments and central banks. Fed’s Mester said she sees inflation risks as tilted to the upside – a sentiment echoed by a growing number of central bank officials around the world.
NFP leading indicators
The leading indicators that we track for NFP have been mostly stronger, suggesting the risks that we will get a disproportionally weaker jobs report are slim:
- ADP 568K vs. 425K expected and 340K last
- ISM manufacturing PMI Employment: 50.2 vs. 49.0 last (+1.2)
- ISM services PMI Employment: 53.2 vs. 53.7 last (-0.7)
- Jobless claims: the 4-week average of initial claims dropped to 344K from 355K previously
Overall, the above indicators point to strength in employment, and so we could see a positive response in the dollar this time around.
NFP trade ideas
So, if NFP and wages data come in around expectations or higher, then don’t expect too much volatility in the markets.
If that’s the case, we will continue to expect the dollar will perform better against currencies where the central bank is relaxed about the prospects of inflation overshooting – such as the Japanese yen and Swiss franc.
However, if the data comes in well below expectations, then yields could drop as investors push out their rate hike expectations. In this potential event, gold on the long side might be the trade to concentrate on.
