NFP preview: Will markets get the weak print they would like?

The July labour market report will be released today at 1330 BST. The market expects a reading of 80k, up from 57k in June. The unemployment rate could edge up to 4.3%, mostly due to a rounding error, and wages may grow by 0.3% MoM. The range of economist estimates for the July payrolls number is between 70k and 115k.  

Although US stocks experienced mild losses on Thursday, markets have rallied hard into this payrolls meeting. The S&P 500 and the Dow Jones have both posted record highs, while the Nasdaq experienced 1% gains on 4 straight days, only the 17^th time it has done this.

Elevated Treasury yields will be sensitive to payrolls reading

However, this report could expose a fault line. US Treasury yields are elevated. Although 10-year yields have fallen moderately in the past month, the 10-year yield is trading above 4.6%, and the 30-year yield is trading just below 5.2%.

Will payrolls break the stock market rally?

The Fed meeting at the end of July saw three FOMC members vote for a rate hike. If we get a stronger than expected payrolls reading and elevated wage pressure, then this could push up expectations for a September rate hike, reinforce the ‘higher for longer’ narrative on interest rates, and break the recent rally in US stocks.

The reverse is also true, a weaker than expected reading could give traders a green light to carry on with the recent rally.

The lead indicators for the payrolls report have been generally weak. Although the ISM manufacturing report for July showed an increase in the employment component of the report, the ISM services sector saw the employment component slump to 47.4 from 51.2, which is deep in contraction territory. Added to this, the ADP private sector payrolls report was also weaker than expected at 44k.

The market’s bias is for a weaker reading

The ADP report was unexpectedly low, and we think that due to this the market is expecting a similar reading for today’s payrolls. This means that an upside surprise in payrolls could spook financial markets later today.

The ADP report showed that services, including healthcare and education, were the biggest contributors to private sector payroll growth. These sectors have been driving most of the jobs growth in the US so far this year, so an upside surprise may need to see other sectors start to do some of the heavy lifting.

The market reaction:

It is worth watching Fed interest rate expectations in the aftermath of today’s report. A surprise reading would have the biggest impact on financial markets. Currently there is a mostly even chance of a rate hike in September. The outcome of the NFP could tip the balance in favour of a hike or remaining on hold for another month.

An upside surprise would have the biggest impact on US Treasury yields, and the 10-year yield is worth watching as it could lead to a breakout above 4.6% towards 5%.

USD/JPY: Will payrolls disrupt yen intervention?

If that happens then it could put upward pressure on the USD, and there is potential for excess volatility in USD/JPY later today, since the yen is fading the recent intervention highs. This pair is now testing the 200-day sma at 158.56, a weekly close above this level would be an extremely bullish development for this pair.

A stronger than expected payrolls reading could push USD/JPY back towards 160, which may spook financial markets, as it would suggest that multilateral intervention to strengthen the yen is not working. If this happens then it could push up global bond yields, and lead to fears of a deeper financial problem if the Japanese authorities need to sell Treasuries to boost their currency in the future. Thus, the outcome of today’s payrolls report could have a broad impact on financial markets.

Gold to rally further is payrolls are weak

The gold price is also worth watching, especially if we get a weaker than expected payrolls reading. The gold price has been rallying into this report, it is now above $4,300, the highest level since mid-June. If we get a weaker reading, then it could extend this rally towards $4,500 per ounce.

Overall, the market reaction to this report is likely to be binary. If it moves the dial for a September rate hike, then we could see sharp market reactions.

USD/JPY

Source: XTB

Gold

Source: XTB