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NFP preview: Stocks succumb to surging bond yields

The most eye-catching moves in the markets at the start of this month have been the sharp rises in government bond yields, causing a bit of fireworks in the equity markets in the second half of this week. The dollar jumped on Wednesday as US bond yields broke higher first, then fell back against some currencies just a day later as the bond sell-off in other developed nations followed suit. More fireworks could be on the way as we head to the final day of the week with jobs data from both North American nations set to hit the wires on Friday, potentially moving the US and Canadian dollars sharply in one or the other direction.

Ahead of the release of the nonfarm payrolls data, the US dollar has been fairly strong, most notably against the Japanese yen (although the USD/JPY weakened on Thursday as risk assets sold off), as well as the Aussie and kiwi. But the greenback has recently underperformed its northern neighbour, the Canadian dollar, and that’s where we will be focusing on in the event the greenback falls in the aftermath of Friday’s jobs report. Overall, though, the closely-watched Dollar Index was up for a second consecutive week, even if it was down on the day at the time of writing.

But could the nonfarm payrolls data cause a significant move this time around? The US Department of Labor will report on Friday at 13:30 BST or 08:30 EDT the number of jobs added to the US economy in September, the unemployment rate, and key wage growth figures. Recently, wage growth has taken on increased importance than the actual jobs number given concerns about rising levels of inflation and in turn interest rates. So, the dollar’s response to the employment report will depend on the outcome of both the headline jobs figure and perhaps to a larger degree wage growth. If they show continued strength then rate hike expectations for December will be boosted further, potentially leading to more losses for US government bond prices, and possibly the stock markets. The dollar may initially rise on the back of this outcome, but it will be interesting to see whether it will hold onto its gains, especially against currencies where the central bank is turning hawkish e.g. the Canadian dollar, pound and euro.

Current NFP Expectations

The consensus expectations for Friday’s headline non-farm payrolls data point to around 185,000 jobs added in September, after August’s slightly stronger-than-expected 201,000 print. The September unemployment rate is expected to have dropped back to 3.8% from 3.9% in August. In terms of wage growth, average hourly earnings are expected to have increased by 0.3% after last month’s surprisingly large 0.4% increase.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a positive overall picture. The ADP employment report came out well above expectations at 230,000 private jobs added in September against a prior forecast of around 185,000. Although very strong, it should be kept in mind that the ADP report is typically not a very accurate indicator of the official NFP jobs data from the US Labor Department. Indeed, it sometimes misses the mark dramatically.

The other main pre-NFP leading indicators we have had were the employment components of the ISM manufacturing and non-manufacturing PMIs. And once again they both exceeded the prior readings, pointing to improved employment conditions in these important industries.

The employment component of the ISM manufacturing PMI rose 0.3 points in September compared to the previous month, although the PMI’s other sub-indices and headline weren’t too great. Perhaps the most important pre-NFP leading indicator – the ISM non-manufacturing PMI employment component – was even more eye-catching, as it jumped 5.7 points in September. And unlike the manufacturing sector PMI, the rest of the report was decent, with new orders and prices both rising.

Meanwhile the unrevised Jobless claims released throughout September have averaged 205,500. This compares favourably with both the average expectations of 210,500 for the September releases as well as the average actual unrevised outcomes of 213,200, 217,250 and 221,250 recorded in each of the previous three months, respectively. So the trend for unemployment-related benefits have been falling, which is obviously another positive indicator for the US jobs market.

Forecast and Potential USD Reaction

Given the overall positive pre-NFP leading indicators, our target range for the NFP for this month is tilted to the upper half of the average expectations. With the consensus expectations of around 185,000 jobs added in September, our target falls in the range of 180,000-210,000, given the above considerations. Though the US dollar will likely be moved by a host of other fundamental factors, any headline jobs outcome falling above this range should give the US dollar at least a short-lived boost. A result falling within the range will unlikely make much of a significant impact, unless the wages figure show a big surprise. And any reading that falls significantly below the range could result in a dollar pullback.

NFP Jobs Created

Potential USD Reaction

> 220,000

Strongly Bullish

200,000-220,000

Moderately Bullish

180,000-200,000

Neutral

160,000-180,000

Moderately Bearish

< 160,000

Strongly Bearish

 

NFP trade ideas

In the event the jobs and crucially wages beat expectations, then we would favour looking for bullish setups on the dollar against currencies where the central bank is still dovish, such as the Swiss franc or Japanese yen. But if the jobs data turns out to be very poor, then we would favour looking for bearish setups on the dollar against the likes of the pound, euro and Canadian dollar – although the latter will be simultaneously influenced by Canadian jobs data.


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