All eyes on the NFP as markets await key insights from the US August job report

Market Thoughts – Friday 6th September

Where We Stand – A quiet Thursday for financial markets yesterday, with conviction lacking ahead of the all-important US labour market report due later today. 

Stocks did slip a touch, with the S&P ending around 0.3% lower, though the tech sector outperformed, showing a degree of greater resilience than has been seen in recent sessions. Still, a third straight daily decline in the benchmark US index isn’t the most inspiring picture for market bulls, even if the lack of conviction to buy into weakness ahead of the aforementioned NFP print is understandable. De-risking & position trimming ahead of that print likely also added to the softness yesterday. 

Nonetheless, while sentiment may have remained a little shaky, yesterday’s data was a little more optimistic than that which had been released this week. 

The ISM services PMI marginally beat expectations at 51.5, though an uptick in the prices paid measure serves as a helpful reminder that, even with a Fed cut less than three weeks away, inflation is not fully ‘dead and buried’. 

Last week’s jobless claims figures were also pretty solid, at 227k on the initial figure, while continuing claims fell 30k from the prior print. Neither datapoint, though, coincides with the survey week for today’s employment report. 

Crude was again on the radar, with OPEC+ appearing to agree a 2-month delay to the long-planned 180k bpd production increase which had been due at the start of next month. Barring a short-term lift in crude, which faded rapidly, the impact of these headlines was relatively short lived, with crude bulls continuing to require a sustained pick-up in demand in order to build a more durable rally.

In the FX space, the dollar was again rather soft, with the DXY surrendering the 101 handle, despite Treasuries paring some earlier gains as the session went on. The JPY, overnight, has been the best performer across the G10 board, as USD/JPY dips under the 143 figure, with the yen standing to further benefit on a weak NFP print later on, not only amid a likely dovish repricing of Fed expectations, but also a spurt of haven demand.

Speaking of which, judging by implied vols if nothing else, the market views this jobs report as the most important since the start of 2023, with overnight GBP, EUR, and JPY vols all trading at their highest levels in around a year.

Look Ahead – It’s finally Friday! However, before we can all check out and enjoy a well-deserved break over the weekend, there is the small matter of the August US employment report for participants to deal with.

Headline nonfarm payrolls are set to have risen by +165k last month, rebounding from the sub-par +114k print seen in July. Unemployment, meanwhile, is set to dip 0.1pp to 4.2%, while average hourly earnings growth is set to quicken by 0.1pp, to 0.3% MoM. Risks, in my view, to these consensus expectations are tilted to the upside, given the significant detrimental impact that Hurricane Beryl had on July’s figures – including +249k temporary layoffs, the most since December 2020 – and taking into account that other labour market metrics, such as the weekly jobless claims figures, don’t signal this substantial weakness having continued into August. More in-depth thoughts on the jobs report can be found here.

In any case, market participants will naturally over-react to the headline print, with the playbook in most investors’ minds seemingly binary – another soft NFP print nails on a 50bp September cut, while in-line, or better than expected, data sees the Fed cut 25bp this month instead. Handily, FOMC ‘big beasts’ Williams and Waller are both due to speak after the jobs data drops, and may help to steer policy expectations before the pre-meeting ‘blackout’ period begins. For equities, it seems a case of ‘bad news is bad news’, and vice versa, with economic worries on a negative surprise trumping the potential for greater policy stimulus in terms of a catalyst for the knee-jerk post-data move.

Elsewhere, today, final Q2 eurozone GDP figures are due, though should show an unrevised 0.3% QoQ pace of growth in the three months to June. The August Canadian employment report is also due, coming hot on the heels of the BoC’s third straight rate cut on Wednesday, with the report likely to show employment having risen +26.5k last month, even as unemployment ticked higher to 6.5%.