NFP: The ultimate litmus test for doves against hawks

US nonfarm payrolls will undoubtedly be the focal point of upcoming data releases. The estimated figure stands at 241k, notably lower than the robust 303k reported in the previous release and below all other readings recorded this year. This anticipated decrease suggests a potential softening in the labour market, which could impact market sentiment and expectations regarding future monetary policy decisions.

Markets

On Thursday, technology shares spearheaded the rally in stock indexes, propelling the Nasdaq Composite to a notable gain of 1.5%

Heading into the key US Payrolls report, stock market losses were trimmed, thanks to a dovish tint to Chair Powell's pressers and the Federal Reserve's announcement of QT tapering in June. These factors, taken together, signalled a modicum of downside protection for the market and provided some ballast. And despite investors navigating in stormy seas this week, Apple's better-than-expected earnings performance provided a further boost to US stock futures, which bounced significantly after the bell.

Apple's Greater China sales were a pleasant surprise on Thursday, for both Apple fans and traders, reaching $16.37 billion, slightly surpassing consensus estimates of $15.87 billion. While the figure represents an 8% decline from the same quarter a year ago, it's considered a relief given early reports that hinted at potentially more significant losses. Despite the decline, any beat in Apple's China sales, no matter how narrow, is likely to be welcomed news for investors.

But in yet another sign of confidence, Apple took another welcoming step by authorizing an additional $110 billion in buybacks. Luca Maestri, Apple's CFO, expressed the board's confidence in the company's future and in the value of its stock. Additionally, Apple announced an increase in dividends, marking the twelfth consecutive year of such increments.

Given the low expectations leading up to Apple's results, the outcome exceeded many forecasts. With solid iPhone sales, a strong performance in Greater China, and a commitment to reward shareholders with cash, it's challenging to find fault with the report. From my perspective, this outcome represents the best possible scenario for shareholders.

NFP on tap

With Powell taking the ferocity out of the bears it puts the ball back into the court of the US data calendar -especially today’s jobs report.

Post-FOMC, the significance of US payroll data has taken on a monumentally heightened significance. And it's a report that consistently has the potential to induce market volatility. But we are at a policy juncture where this particular release could stir up a lot of market noise. On one hand, if the data comes in strong, it would undermine a considerable portion of the confidence conveyed by Chair Powell during the FOMC press conference. This scenario could put the 10-year yield back on a collision course with 5%, as Powell's reassurances will lose their impact rapidly. Conversely, if the data disappoints, it would likely bolster the market's confidence in Powell's dovish stance, potentially tempering the upward pressure on yields.

In summary: Federal Reserve Chair Jerome Powell offered a degree of reassurance to investors on Wednesday, alleviating concerns about the imminent prospect of an interest-rate hike. However, he also suggested that the threshold for rate cuts had increased, introducing additional uncertainty regarding the timing of any potential cuts.

Now it’s time to see what court the ball lands, as NFP serves as the ultimate litmus for Doves versus the Hawks.

Finally: When reality consistently defies expectations, it's prudent to reexamine your assumptions, as they may be flawed. Embracing unconventional thinking can prove beneficial.

Both the Federal Reserve and its numerous critics share a reluctance to entertain the notion that high-interest rates might actually stimulate economic growth in the U.S., or more accurately, that the stimulative impact of high rates under current circumstances outweighs their restrictive effects, leading to heightened demand.

Forex

In what could be considered a masterclass in central bank intervention, traders in Asia are gathered around the coffee machine, marvelling at USD/JPY sitting some 600-700 pips lower than when Japan’s Ministry Of Finance, via the Bank of Japan, initiated their intervention regime. It's proven to be far more effective than anticipated.

I suspect many investors holding long positions on USD/JPY above 153-155 got spooked by the determination of the Ministry of Finance to appease a thundering horde of Japanese individuals concerned about the yen's weakness.

However, some analysts have been quick to make bold predictions, such as forecasts for the yen to reach 165. Yet, predicting currency movements beyond a short timeframe, say 4-8 weeks, is akin to guesswork.

To witness a significant depreciation of the yen, possibly to 165 or beyond, factors such as a substantial increase in US 10-year yields would likely trigger VAR deleverage across stocks and commodities. This could lead to capital flows back to Japan, naturally strengthening the yen.

I’m not saying 165 could not happen, I’m just saying it is as unlikely as USD/JPY trading sub 140 this year.