All eyes on NFP

Sentiment was mixed at yesterday’s trading session. Equity bulls were timid, while the dollar bears were in charge of the market after the latest PCE data, which is the Fed’s favorite gauge of inflation showed that the core PCE index slowed more than expected in October. Personal spending accelerated in line with expectations, while income rose more than expected.

The softening inflation sent the US dollar index tumbling below its 200-DMA for the first time since summer 2021. The US dollar index slipped below its major 38.2% Fibonacci retracement on 2021-2022 rally, and stepped into the bearish consolidation zone. Finally!

The EURUSD advanced above the 1.05 level for the first time since June, and broke above its own long-term negative trend top. Cable cleared the 200-DMA, which stands at 1.1250, and advanced past the 1.22 mark. The dollar-yen fell to 135 mark this morning.

All these moves seem like a miracle happened, but be careful, because according to the activity in swap markets, the pricing of the Fed’s peak rate fell to 4.9% this week, which is an alarming sign that the market is not pricing well the Federal Reserve’s (Fed) communication. The Fed will probably go beyond the 5% mark - this is at least what the Fed officials are killing themselves to say - and the rates will stay there for some time.

So, there is a risk that we won’t see a one-direction trade for the US dollar in the coming weeks. The US dollar may not soften as smoothly as it strengthened over the past year and a half, and any piece of news or data that would rectify the Fed pricing could reverse the dollar’s latest losses.

US equities consolidate near critical level pre-NFP

Trading in equities was much less festive than the FX yesterday, as the ISM manufacturing index warned that the US manufacturing activity fell below 50, the contraction zone, for the first time since summer 2020.

The S&P500 flirted with the 4100 mark, and closed the day around the ceiling of the ytd descending channel, while Nasdaq remained flat around its 200-DMA, which is a touch above the 12’000 mark.

Today, the much-expected jobs data should determine whether the S&P500 deserves to quit the ytd negative trend, or stay in it.

If you asked me last week, or at the beginning of this week, how the market would react to a strong NFP data, I would say, probably poorly – because we know that the Fed wants the labour conditions to deteriorate to fight inflation, and strong jobs data would only revive the hawkish Fed expectations and send equities lower.

But after having seen the overly optimistic market reaction to Jerome Powell’s speech on Wednesday - which gave away no new information but which triggered a weird euphoria across risk assets - I think that investors are dying to price in the goldilocks scenario, which is the sweet combination of slowing inflation, but a mild economic slowdown, which means mild deterioration in the US jobs data.

Therefore, a fairly strong NFP print today, around or slightly above the 200’000 penciled in by analysts, should boost risk appetite and help the S&P500 close the week above its 200-DMA, and above the ytd bearish trend.

A soft figure, like Wednesday’s ADP report, could increase recession odds and keep equities under negative pressure.

Then, there is a slim possibility that we will see a very strong figure, at 300’000 or above. In that case, we shall see the Fed hawks take the upper hand again, and send equity valuations lower before the weekly closing bell.