Hawkish Federal Reserve bets have picked up pace this week ahead of today’s jobs report. 298k jobs are expected to be created in August.
· EUR/USD trades below 1.00 ahead of eurozone PPI, which is expected to rise to 37.3%
· A strong NFP could cement expectations for a 75 basis point Fed rate hike
· USD/JPY trades over 140.00 at a 24-year high
Disappointing data and rising recession fears saw stocks in Europe close firmly lower yesterday. The FTSE closed 1.8% lower after UK manufacturing activity contracted at the fastest pace since May 2020, the depths of the pandemic. However, miners were the biggest drag hurt by disappointing manufacturing data from China and new COVID lockdowns.
The DAX closed 1.6% lower despite a strong rebound in German retail sales. Investors focused on the ongoing gas crisis, a worse-than-expected contraction in manufacturing, and the rising prospect of gas rationing this winter.
Meanwhile, US stocks managed to rise off session lows after stronger than forecast jobless claims and ISM manufacturing data and as bargain hunters jumped in. The Dow Jones and the S&P500 managed to close in positive territory, snapping a four-day losing run. The late rise on Wall Street is translating into a positive open in Europe.
Eurozone PPI
Eurozone PPI inflation will be the central focus in the European session as investors await the US non-farm payrolls. PPI is expected to rise to 37.3% YoY in July, up from 35.8% in June. Hot factory gate inflation often suggests that consumer prices will continue rising. Given the record high CPI, the ECB is widely expected to hike rates by at least 50 basis points, if not 75. A tighter monetary policy backdrop is a tougher environment for companies to flourish in.
While EUR/USD rose to 1.0060, this was a lower high, and the pair is once again below parity heading toward the European open.
Non-farm payrolls
Jobless claims unexpectedly fell to a two-month low, and job vacancies unexpectedly rose to 11.2 million, but the ADP report was significantly softer than expected at 132k, missing the almost 300k forecast. The jobs data so far this week has given mixed messages. However, it is worth noting that the non-farm payrolls has surprised to the upside for the last three months. July’s report was a real eye-opener, with 528k jobs created and few signs of an economic slowdown creeping into the labour market.
August’s report is expected to show 298k jobs were added, which would mark another very solid month for the jobs market. Wage growth, which has also been strong, is expected to tick higher to 5.2%, and unemployment is expected to remain unchanged at 3.5%. Interestingly the labour participation rate fell to its lowest level this year in July at 62.1%. The rising cost of living hasn’t yet prompted a mass return to the jobs market.
This NFP is the last one ahead of the FOMC, and the CPI won’t be released until after the Fed meeting. This means it is the last major data point ahead of the rate decision. A strong report could cement expectations for a 75 basis point hike. According to the CME fed funds, the market is pricing in a 74% probability of a 75 bp hike. Should this arise, the USD could rally further while stocks and gold come under pressure.
USD/JPY
Heading towards the report, USD/JPY trades at a 24-year high above 140.00. A solid jobs report could see the pair push higher towards 147.65, the 1998 high.
Gold
Gold is another one to watch. It trades at 1700 after rising off yesterday’s 6-week low of $1688. A strong report could see gold take out yesterday’s low and head towards 1680, the 2022 low.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.
