Markets hover in anticipation of Nonfarm Payrolls

Markets are in a bit of a limbo waiting for new Nonfarm Payrolls data on Friday and signals from the Fed policymakers. For the last week, the Nasdaq100 and S&P500 have been gradually shedding on low volumes, reflecting investor wariness in anticipation of new signals. The VIX index jumped 7% yesterday to 18, after touching 16.7, near the year's lows.

Caution is also evident in the currency market, where the dollar index continues to trade around 90. The DXY movement promises to be indicative of most asset classes over the coming days or even weeks. The current lull could be both a respite before a new attack by the dollar sellers and a sign of sustained chart support from those levels.

In the run-up to NFP, let's try to dig into the freshly released data to search for hints about the state of the economy in general and the labour market in particular. For example, yesterday's Manufacturing PMI figures are largely uninspiring. The main thing is that the Fed came to similar conclusions.

Thus, the ISM manufacturing index reached 62.1 in May, having climbed above 60.7 a month earlier and exceeded the forecast of 60.8. Despite seemingly good results, we see more signs of caution in these figures. The price component seems to have peaked similarly to how it did in 2008. The employment component fell sharply, by 4.2 points. This is a strong signal that the acceleration phase of the labour market recovery is over. However, there are still 8 million fewer jobs in America than before the pandemic hit. The drop in stocks is due to supply disruptions rather than demand boom, as shown by the fall in the production component.

Last month's labour market report unpleasantly surprised with weak employment growth. Yesterday's ISM report showed that employment growth could also be alarmingly slow in May. In any case, this will once again shift the focus to the Fed. Investors will be watching to see whether this situation worries the regulator and whether it will wait patiently or take the path of tapering of stimulus. The answer to these questions will, without exaggeration, decide the fate of the dollar in the coming weeks.