Today is the most important day of the whole month for market players because we will get to see the latest reading of the US NFP data. This economic reading commands the most attention among investors and traders. The economic data may not only set the trading tone for today but also for the rest of the month. As always, the Fed will watch this data very closely, and it is highly likely to influence their monetary policy decision.
US and European stock futures are trading lower ahead of this data. Traders are going to take a very cautious approach ahead of the US NFP data. Generally speaking, there is minimal volume in the markets ahead of this data as the action tends to happen only after the economic reading. Market players expect the US NFP number to produce another set of decent readings, which could only push the US dollar index higher.
The dollar has picked up strength against the Euro, Japanese Yen, British Sterling, and other G10 currencies.
The US NFP data will be released at 13:30 BST, and the forecast for the number is 200K, while the previous number came in at 263K. The US unemployment rate is also expected to print the same reading as the previous month which was 3.7%. As for the Average Hourly Earnings m/m, the data is expected to come out slightly softer than the previous reading. The forecast is for 0.4% while the previous month the number came in at 0.6%
The Market Playbook
Now the important part and how this is going to impact the markets. The US ADP number, which came out this week, has set a positive tone for the US NFP data as the US ADP number produced a strong reading. The data confirmed that there are no signs of weakness creeping in for the US labour market.
The range of US NFP estimates for today’s number is wide, and it is expected to be anywhere between the 150K and 200K mark. But we think the most important number is 100K. Meanwhile, anything lower than 100K could throw the stock market out of balance, along with the Fed. That’s because if the number comes below the 100K reading, market players will begin to question the current aggressive stance from the Fed.
Remember, the Fed has been increasing the interest rate aggressively last year and there is no doubt that the Fed wants to carry on with their monetary policy by front-loading it, and this means that in the coming meeting, we could expect the Fed to raise the interest rate by pretty much the same amount.
Nonetheless, a soft number will make the Fed question its current monetary policy as the Fed may not want to tighten the monetary policy while economic conditions are deteriorating.
On the flip side, if we see a number that emerges better than the market expectations, the Fed will feel comfortable with its monetary policy. They are likely to adopt a more hawkish monetary stance, and an interest rate hike of 50 basis points may become likely again. Several Fed members have already indicated that they are less concerned about tipping the US economy into a recession as the priority is to control inflation. This has made many traders wonder if the Fed is on a path which could lead them to another terrible policy mistake.
The US stock market has seen a major rollercoaster ride this week and traders are getting frustrated as the price action isn’t forming a major trend. The big bounce that we saw for the S&P 500 has started to fade to a large extent and this has confused many traders about the direction of the stock market.
Nonetheless, the important factor to consider is whether the US economy is heading towards a recession and stagflation. If today’s economic number gives any indication of that, meaning confirming weakness in the labour market; we could see the sell-off picking up more strength. But the sell-off may not be that intense, as many expect the US economy to fall into a recession.
If the numbers emerge better than expected, we could see an intense sell off for the US stock market as that would mean that the Fed will continue with its hawkish monetary policy and the risk of a prolong recession taking place could increase further.
The precious metal is struggling to find many bids and yesterday we saw the prices dipping into negative territory but still above the 1,800 price level. The sell-off in the gold price is mainly due to the strength of the dollar index.
As for today, the shinning metal’s price is going to be highly reactive to the US NFP reading as the number is going to bring wild swings in the dollar index. A strong reading or anything which will match expectations is likely to push the gold price lower and vice versa.
The near-term resistance for the gold price is at 1900, while the support is at 1760.