Indices are down, the dollar slightly stronger, and the returns on US debt securities at lower levels. Gold is below $2500, and oil is the cheapest since March 2023. This is the market picture after Friday’s, at this moment, most important data from the USD economy – the NFP report. The situation remained without spectacular volatility. Risk aversion increased slightly but the fear index VIX is still far from the extreme levels we experienced a month ago.
The report from the US labour market did not provide a clear indication of what the Fed will do on September 18. This is, of course, about the scale of monetary easing. Investors are still wondering whether it will be 25 or perhaps 50 basis points. The market reaction shows that after the publication there were many doubts about how to interpret the data. Some items failed and were below the market consensus, some colloquially “drove” the result. Ultimately, the indices ended the day on the downside, the dollar slightly appreciated, and the debt market showed a decline in returns.
All those who expected on Friday to get a repeat of events from a month ago may feel disappointed. After 2:30 pm, we saw a seesaw of fluctuations in financial market prices. All because the interpretation of data was not easy and clear this time.
Let’s look at the specifics. In August, the main number, i.e., the increase in jobs in the United States, was 142 thousand, which fell short of forecasts, which oscillated around 165 thousand. It should be mentioned here that both previous readings, for July and June, were revised down by a total of 89 thousand jobs. The positive was a decrease in the unemployment rate to 4.2% from 4.3%. Average hourly wages increased significantly both month on month and year on year.
After a weak July report, market participants asked themselves how much of the result was influenced by one-off factors and whether such a large disappointment was only a kind of “work accident”. The subsequent revision of annual data (to March 2024) of more than 800,000 jobs reinforced the market’s belief that there is a slowdown and its initial effects are already visible. The fact that the Fed put so much emphasis on the NFP data gave room for even more speculation that unnerving things are beginning to happen in the economy. The possible effect of Hurricane Beryl was mentioned, although the BLS in its statement said that the impact of this weather event on the data was marginal.
There is no doubt that the data shows a slowdown, but it is gradual and we have not experienced more significant shocks. On the positive side, the average working week has been extended. We also saw an increase in hourly wages. However, the Sahm rule still indicates a recession, as the indicator sent by it currently stands at 0.57 percentage points, and the threshold is 0.5%.
The data are quite weak, slightly better than July but do not cause panic in the market. Relying on statistics, we should assume that they will be revised downwards in a month because such a tendency has prevailed for many months. The futures market in the first few minutes after the publication began to price in more strongly the possibility of a 50 basis points cut in rates this month. The implied probability grew to over 50%. However, it was reduced in the following trading hours and returned to its value before 2:30 pm and currently stands at less than 30%. Now we are looking forward to inflation data, which will be the final chance for interpretation and drawing conclusions. We will learn them on Wednesday (CPI) and Thursday (PPI). We are entering a period of “blackout”, which means that we will not receive any more clues from Fed representatives in the coming days.
On Friday, Christopher Waller of the Federal Reserve highlighted the need for rapid rate cuts in the face of a weakening labour market and outright admitted that there may be 50 basis-point moves. Theoretically, this should be negative news for the USD, although it was not visible on the chart. The market still counts on the Fed to cut the cost of money this year by a total of 100 bp. I personally assume that a stronger reaction from the US central bank could cause a lot of nervousness in the market and therefore I assume that Powell will decide on a calm three steps of 25 bp by the end of this year.
Łukasz Zembik, Oanda TMS Brokers.
Source: https://ceo.com.pl/rynki-w-dol-po-raporcie-nfp-brak-jasnych-wskazowek-od-fed-dolar-silniejszy-ropa-najtansza-od-marca-74391
