Today is a big day for markets, and investors should brace themselves for a volatile trading session. All eyes will be on a major headline coming from the US– and that is the US NFP data. The US nonfarm payroll data is going to set the trading tone not only for today but also for the rest of the month. In addition to this, the headline number is also going to have a profound influence on the Fed, which will be announcing its monetary policy decision in a few weeks’ time.
Looking at the numbers released so far this week, especially some of the economic data which was released yesterday, it will be no exaggeration to say that the tone is set for a fairly strong economic reading. This is mainly because this week, we have seen robust readings in terms of the US ADP employment, the US Non-Manufacturing Services PMI, the US Weekly Jobless Claim, and to some extent, the US Manufacturing Services PMI as well. Hence, there is no reason why we wouldn’t expect the upcoming US NFP reading to be a strong number.
So, the tone is set for a strong US NFP reading today. We are likely to see an increase in hiring, and the actual reading could easily match the forecast of 655K jobs. The forecast for the unemployment rate is to fall to 5.9%. This number unexpectedly jumped to 6.1% last month, mainly due to a surprise increase in the participation rate to 61.7%.
The big question for investors and traders is how these numbers are likely to influence the stock market, the forex market, the commodities, and of course, the fixed income. If we look at the dollar index, it is safe to say that a bottom may be in place, at least for now. Throughout this week, we have seen a decent bounce in the dollar index, especially during the last few days. The strength in the dollar index has brought weakness for the currency pairs such as the euro-dollar, the sterling-dollar, and several others.
We have also seen gold prices coming off their 5 1/2 month high, and now the precious metal is solidly trading below the critical price level of 1900. The fear among investors and traders is that the strength in the economic numbers is going to prompt the Fed to adopt a more hawkish stance towards their monetary policy. Economic conditions have improved, and that means the Fed will have to adjust its own monetary policy in order to reflect that. This is likely to be the message from the Federal Reserve Chairman, Jerome Powell, who will be speaking in a few days from now. In terms of the gold price, this means more weakness could be heading for gold prices.
As for the equity markets, we’re likely to see the repeat of the taper tantrum. The future path of the US equity market is very much based on traders’ reactions to the Federal reserve’s monetary policy stance. If they begin to lose confidence due to the tightening of the monetary policy, we could see the equity markets easily falling off the cliff. However, if the narrative is that the Fed is only adopting a hawkish monetary policy stance because of the improvement in the economic activity, we could see more upside for the US indices like the Dow Jones, the S&P 500, and the Nasdaq.