As we move to the end of the week, the focus shifts to the macro data, and to the strength of the labour market in the US. August payrolls are released on Friday at 1330 BST, and the market is expecting a reading of 58k. The unemployment rate is expected to remain steady at 4.1% and wage growth is expected to moderate slightly to 3% last month, down from 3.2%.
One-off factors to influence the report
There could be some one-off factors that influence this report, including the loss of Temporary Protected Status for over 300,000 Haitians who were living in the US. This could influence the NFP number, although the unemployment rate should be unaffected. A number of meat processing plants also closed last month due to a beef shortage. To neutralise some of these factors, employment in the education sector should pick up after dropping in August, which is part of a seasonal pattern. Even so, these two one-off factors could weigh on NFPs, and there is a risk of a downside surprise.
How this data may impact the Fed
Investors will be watching these numbers closely to see what they mean for the Fed’s future monetary policy decisions. Full employment is one half of the Federal Reserve’s mandate, although new chair Kevin Warsh is mostly focused on inflation. It is reasonable that Kevin Warsh is not as focused on the labour market, if the unemployment rate remains at 4.1% this is below the rate that indicates full employment, so the Fed does not need to act to boost the jobs market. Due to this, although the NFP report is important for investors, we think that the CPI reading for August, which is released on September 11th, will give a clearer signal of whether the Fed will raise interest rates later this month.
The wage component of today’s labour market report should show that wage growth is slowing, even though the unemployment rate remains low. This could ease some concerns about sticky inflation in the US, and may embolden the doves at the Fed to resist voting for a rate hike at the next FOMC meeting.
Fed to look at broad macro picture
However, the labour market report cannot be viewed in isolation. The Fed will look at it as part of a suite of economic data, and traders should too. The ISM services report was stronger than expected for last month, with new orders rising sharply. The employment component remained subdued, however, this is to be expected in a low hire/ low fire environment, especially when the labour force participation rate is also slipping.
Overall, this report will not give us a definitive answer on whether the Fed will hike rates or not at their meeting later in September, but a surprise number will still be important for financial markets.
Markets start to price out chance of September Fed rate hike
Currently the market is pricing in a 50% chance of a rate hike from the Fed this month, this is down from 66% earlier in the week. The drop in expectations was driven by a weaker than expected reading for the ADP employment report, which showed 38k private sector jobs had been created, missing the 47k expected. If we get a weak reading for the NFP, we could see rate hike expectations get priced out even further. This shift in rate expectations is why financial markets, including stocks and bonds, are rallying into the NFP report.
A downside NFP surprise could trigger a stronger and more prolonged rally in stocks and bonds, as Treasury yields would most likely fall. It could also weigh on the dollar, and boost the yen, which had a sharp rise on Thursday. USD/JPY fell 2% after Scott Bessent said that he would urge the BOJ to hike rates at their meeting later this month.
Gold will be sensitive to NFP reading
However, the gold price could rise if interest rate expectations fall too far. The gold price has had a strong performance over the past month, although it has seen volatility pick up since Kevin Warsh’s hawkish speech at Jackson Hole. Ahead of the payrolls report, the gold price is rallying, it jumped by more than 2% on Thursday, and is trading above $4500. If the gold price rises further, $4542, the 200-day sma, comes into view. A break above this level is a bullish development that opens the door to further gains.
How would the market react to a stronger payrolls reading?
The opposite is also true. A strong payrolls report could see an increase in the probability of a rate hike on the 16th September, which could weigh on the gold price, send USD/JPY back towards 160, and put downward pressure on bonds and stocks.
From a technical perspective, the Nasdaq 100 is also worth watching later today, after momentum in the index has begun to slow. It has picked up in the last two days, but ironically a weak payrolls report that eases pressure on the Fed to hike rates could trigger a fresh rally in
the US’s main tech index.
Technical indicators like the MACD and the RSI are supportive for the Nasdaq 100, and the index is currently 5.5% away from the record high set in June. The 50-day sma at 29,377 is acting as short term support, a decisive break above this level is a bullish development for the index.
Chart 1: The gold price, key resistance is coming up
Chart 2: The Nasdaq, are new record highs beckoning?
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