Payrolls matter more for the market than Fed?
Head of FX Strategy
Summary: Today’s US June jobs report is highly anticipated as the narrative has developed that the data could prove the deciding factor for the size of the coming Fed rate cut at the July 31 FOMC meeting. But the payrolls change number may be more important for tactical traders than the Fed’s decision.
Hardly anything to wrap as yesterday US markets were closed for US Independence Day, with President Trump calling for “unity” at a Fourth of July speech at the nation’s capital. US S&P futures trading at record highs for the cycle overnight, though the Asian session was rather lackluster heading into today’s important US data releases.
Note: Traders might consider using very short-dated options to protect USD shorts in lieu of market stops over the US payrolls release today…may result in more cost, but keeps the trade alive regardless of short-term price movement.
• Maintaining USDJPY shorts with stops just below 108.50
• Maintaining half EURUSD long with stops below 1.1225 (looking to add early next week if >1.1350)
• Maintaining long AUDNZD with stops below 1.0425 targeting minimum 1.0625, eventually 1.0700
• Maintaining EURNOK shorts with stops above 9.675 for a look at 9.50 and lower eventually
How important are US payrolls today?
The market narrative has been dominated lately by the question of the size of the Fed’s rate cut at the July 31 FOMC meeting, in which the majority are still looking for a 25 basis move rather than a 50 basis point chop. And they see today’s US June jobs report, especially the June Nonfarm Payrolls Change number as the possible arbiter of the Fed’s decision at that FOMC meeting. (Note, as we have previously pointed out, that revisions of the prior two months’ data can carry additional weight on top of the headline release. We pointed recently to an article by the redoubtable A. Gary Shilling highlighting the importance of recent consistent negative revisions to payrolls change that suggest payrolls growth may have taken a cycle turn for the worst in April and that the US may even already be in recession.)
While the market may prove highly reactive to a surprise either way, I think it is already very highly likely that the Fed cuts 50 basis points at the July meeting for two reasons. First, despite the snowballing anticipation of significant Fed easing, the US yield curve has entirely failed to steepen, and in fact in recent days long yields have flattened more aggressively and reversed what looked like a budding steepening of the yield curve. A flattening yield curve suggests the fed is behind the curve in providing stimulus. Second, the US dollar has failed to materially weaken and is still not far from the multi-decade highs, according to the Fed’s measure of the trade-weighted USD, at least.
A pivot in risk appetite?
The complacency levels across global markets are remarkable. Equity markets are massively bid, corporate credit is complacent, and EM carry traders have been rewarded with spectacular returns. Two of the best performing currencies since the May 1 FOMC meeting are the Turkish lira, up over 10% carry adjusted versus the USD, and the Argentine peso, up over 15% over the same timeframe. So today possibly offers an important sentiment test in the even we get bad – and especially very bad – US jobs data and whether such data continues to egg on risk-taking from the perspective of lower rates and the anticipation of further easing from the Fed and other central banks, or whether the mentality changes on fears of an incoming recession and whether the Fed is still badly behind the curve.
Perhaps equally interesting would be a decent upside beat for the US payrolls number today and how the market digests that – are we in the upside-down world where US economic strength is the worst thing in the world for markets because it throws into doubt the progress of the oncoming Fed gravy train?
Watching the key resistance zone in AUDUSD here as we ask the risk appetite pivot question above. If we have both weak US data and the market continuing to celebrate and even-lower, even-quicker Fed policy rate, as opposed to fretting the global growth downturn, then AUDUSD may continue to pull higher here – looks pivotal in this area between 0.7000- and 0.7100 either way.
USD – a lower path for the Fed quicker eventually USD negative, but again, the “rockiness” of the path is a critical question, as we have historical precedent for the USD serving as a safe haven even as the Fed aggressively cutting as the normal reason for the latter is a global deleveraging of risk assets.
EUR – looking for the euro to eventually turn higher versus the US dollar, but incredibly low interest rates and prospects for further ECB cuts don’t provide much inspiration. For perspective, the German 30-year sovereign bond has matched the drop bp-for-bp of the US 30-year yield despite the former trading below 25 basis points.
JPY – the yen rally fizzling slightly on the intense enthusiasm for risky assets globally despite yen normally tracking long US yields most closely. The rally in EM in particular throwing up a bit of a hurdle here as Japanese carry traders are enjoying strong returns on EM carry trades funded in JPY.
GBP – UK’s Services PMI this week barely indicating expansion – hard to believe the market pricing still rather low odds for a BoE cut at the Aug 1 and even Sep 19 BoE meeting despite recent Carney rhetoric.
CHF – the flap over the loss of EU access to the Swiss stock exchanges not driving much volatility. A key test for EURCHF if we trade near 1.1000.
AUD – a tax cut passed earlier this week but looks like small beer in GDP terms and supply side measures won’t have much impact if the country is sliding toward a recession. Watching the risk appetite angle here as described above for whether AUDUSD is toppish here or can power higher. Ugly iron ore correction in China overnight seeing little impact on AUD so far.
CAD – as with AUD, CAD is bumping into an important resistance zone versus the USD here (1.3000 in USDCAD) and wondering if we need a further melt-up in complacency to drive immediate further strength in commodity dollars. Risk of mean reversion in Canadian jobs numbers points to risk of a weaker jobs report from Canada today.
NZD – prefer to view NZD through the prism of AUDNZD, where we note the recent backup above 1.0500 – technically promising for bulls (kiwi bears), with a fuller pull back to 1.0600 suggesting a more constructive medium term bullish outlook.
SEK and NOK – neither of the Scandies seeing immediate further momentum on their break higher versus the Euro as the two central banks are alone in the world in projecting higher rates.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – Canada Jun. Net Change in Employment / Unemployment Rate
1230 – US Jun. Nonfarm Payrolls Change
1230 – US Jun. Unemployment Rate
1230 – US Jun. Average Hourly Earnings
1400 – Canada Jun. Ivey PMI
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.