August Payrolls – Expect volatility on market positioning

Sep 04, 8:09 am
US Dollar

The Fed rate setting committee will get to see how well the US labour markets fared last month as the August payrolls report marks the final and perhaps very important piece of report when the Fed’s FOMC members huddle on September 16th and 17th to decide the future course of action. In July FOMC meeting, the Fed members noted that due to lack of inflation, the members would find it more comfortable to see the US unemployment rate drop even further. It is perhaps this statement that has brought a lot of buzz to the markets today.

The median forecast estimates for August payrolls is for the unemployment rate to have fallen to 5.2% from 5.3% while the average number of jobs created is expected to be around 215k, almost the same number of jobs created last month.

The market participants are divided however. Some expect to see a weaker print albeit above the 200k trend considering that August is expected to seasonally print a weak number only to be revised up later. Some analysts expect to see the unemployment rate also remaining unchanged at 5.3%. A decline to 5.2% will bring the US unemployment rate closer to the Fed’s NAIRU of 5%.

The big question is how the markets will react to the NFP number considering there are a lot more variables this time around. In particular, markets could be focusing on the following:

  • The monthly jobs
  • Unemployment rate
  • Average hourly earnings
  • Revisions to previous data

Each of the variables is likely to shape and twist market sentiment which currently see’s a decline in the probability of a Fed rate hike in September, leaving the door open either for an October or a December rate hike.

Inflation data received since July has barely moved and remained stuck to the 1.8% level on the core, staying consistently below the Fed’s target rate of 2%. Besides the slump in Crude Oil, global concerns of the slowdown from China have also been worrying the markets. Most of the other central banks have maintained a dovish tone, with the ECB being the latest to join the dovish camp as the staff economic projections sharply revised down growth and inflation forecasts. This has pretty much left the Federal Reserve as the last man standing considering that China has also started to aggressively intervene in the markets by devaluing the Yuan, in what is being seen as exporting deflation to the US.

Considering the above and putting it into context, today’s Nonfarm payrolls report is likely to make markets very volatile as investors and large money could start to shift around in a bid to position ahead of the Fed’s meeting in two weeks time. Of particular interest will be the USDCAD, where the Canadian jobs report is also due at the same time, followed up by the Ivey PMI data an hour later. The markets are likely to enter a holding pattern with little to flat movement being expected across the major currencies.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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