NFP preview What happens on another miss

As expected the RBNZ made no changes to policy settings and the forward-looking guidance remained dovish. The RBNZ’s forecasts for GDP, inflation, and employment were again revised higher.

The hawkish surprise was that the RBNZ removed the “unconstrained OCR” in its published forecasts and after a 12-month absence, the reintroduced OCR track showed a full hike by Q3 2022 (markets had already priced this in) and a total of 150bp of hikes by mid-2024.

In a final knife twist to the cadre of remaining central banks still holding onto an ultra-dovish and patient mantra, the RBNZ removed its reference to a negative OCR.

In response, the NZ interest rates market has been thrown into turmoil. For those unfamiliar with the NZ interest rate market, it's very popular with macro hedge fund and bank traders, however, it is notoriously illiquid when it's time to exit.

Pricing for the August 2022 OIS has rallied 16bp to 0.66%. The yield on June 2022 bank bill futures has rallied 13bp from 0.45% to 0.58% and the yield on the 2yr swap rate is 7bp higher at 0.59%.

In the currency space, the NZDUSD has rallied from 0.7230 to a high near 0.7308, and the AUDNZD cross rate has fallen from 1.0725 to a low near 1.0651 at the time of writing.

As viewed on the chart below, the decline in AUDNZD from the March 1.0951 high has accelerated today post the break of the trendline support near 1.0700, coming from the March 2020 low.

This opens the way for AUDNZD to move lower towards medium-term support 1.0550/1.0450 and AUDNZD short positions are recommended. Aware that a break/daily close back above today’s high at 1.0835 is required to negate the bearish bias.

Source Tradingview. The figures stated areas of the 26th of May 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

There are some suggestions the weaker than expected payrolls print in April (266,000 actual vs expectations of almost 1 million new jobs) was the result of technical issues or labor supply factors rather than an indication of underlying labor market weakness.

Nonetheless another miss this month would likely raise more questions and present a setback to the timetable that the Federal Reserve can announce its plans to taper.

Expectations for May payrolls are for a 650,000 rise in new jobs, and for the unemployment rate to drop from 6.1% to 5.9%, supported by a further easing of business restrictions, offsetting the headwinds of labour supply factors.

How will markets react to another out-of-consensus payroll print?

Some care is required in defining exactly what constitutes a payroll's “beat” or a “miss”, given the multiple feeds into the print (revisions, hourly earnings, sub-components).

Hence we will work on a “miss” being +/-200,000 on either side of the consensus expectation of 650,000.

An increase of 850,000 new jobs will likely be taken as confirmation the US recovery remains on track, and lead to a more hawkish Federal Reserve and a stronger US dollar. Value stock indices such as the S&P500 should outperform the Nasdaq that traditionally struggles under the weight of higher interest rates.

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A softer than expected number of 450,000 new jobs or less will be taken by the market as an indication the Federal Reserve will remain dovish for longer and open the way for another bout of US dollar weakness. The Nasdaq should outperform value indices and gold would likely set sail towards the next layer of resistance near $1965.

Currency pair to watch during NFP: GBP/USD

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GBP/USD continues to test the layer of resistance at 1.4245/55 coming from the February high, at this point lacking the conviction to either convincingly break above or reject it.

Should Friday's US payroll data be weaker than expected and GBP/USD can cement a break above resistance at 1.4245/55, look for GBP/USD to extend its rally towards 1.4600.

Source Tradingview. The figures stated areas of the 1st of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation