Global markets are on high alert as investors await the June Nonfarm Payrolls (NFP) report from the United States, which is due to be released today, a report that is seen as having great potential to change market expectations for the Federal Reserve's (Fed) monetary policy.
While previous employment data still showed strong signals in the job openings sector and a slight increase in manufacturing activity, a surprise decline in private sector employment this week has raised concerns that the labor market slowdown may be more pronounced than expected.
With the Fed's policy entirely dependent on current data, today's report is expected to be a key determinant of the direction of the US dollar, the position of bond yields and overall investor sentiment.
Market Focus: Employment Data to Be the Main Focus
We at SARACEN MARKETS expect today's NFP employment report to show an increase of around 106,000, down from 139,000 in May. The unemployment rate is expected to rise slightly to 4.3%, while the annual wage growth (Average Hourly Earnings) is expected to remain at 3.9%, indicating that wage pressures remain even though job growth has started to slow.
In a forum organized by the European Central Bank (ECB) in Sintra recently, Fed Chairman Jerome Powell stressed that all Fed meetings are still “open” to any decision, but they still need more data before making any policy changes.
If today’s NFP data report reports a reading of less than 100,000 jobs, this will reinforce expectations that the Fed may cut interest rates as early as July and this could weaken the US dollar.
On the other hand, if the figure exceeds 150,000, the market may reassess some of the expectations of easing interest rates and the dollar could strengthen again.
“Recap” of This Week’s Employment Data Report
JOLTS (May): Data shows a large increase in the number of job vacancies, a sign that labor demand remains strong.
ISM Manufacturing Index (June): Slightly up to 49 points, still below expansion level (50), but better than previous months.
ADP Data (Private Sector Employment): A decline of 33,000 jobs, the first decline in more than two years, raising big questions about the true direction of the labor market.
Today's NFP report will be the key to the Fed's policy direction for the coming months. It will be the 'leading indicator' of all previously released data.
Implications for Policy and Market Position
Following the disappointing ADP data report, investors have started to adjust their expectations. The market is now pricing in around 64 basis points of rate cuts by the end of the year, with a 25% chance of the Fed acting as early as July, although that probability could still change.
Fed Indicators:
Powell remains cautious.
Several Fed Governors such as Christopher Waller and Michelle Bowman have also shown openness to act sooner if employment and inflation data support.
Summary
Today's NFP report could be considered the most important moment of the month for global currency markets. With the weak ADP reading and lackluster wage growth, the market is now likely to expect a negative surprise in today's data.
If the data confirms the weakness in the labor market, investors are expected to sell the USD in a big way.
Major currencies such as the euro, pound, and Australian dollar could surge.
Gold is expected to be in high demand as a hedge against rate and geopolitical risks.
