The current week will wrap up with the most important monthly release out of the US, namely the country’s jobs report due at 1230 GMT. Wage growth is anticipated to again attract the lion’s share of attention out of October’s report. A beat on this front will theoretically more conclusively put on the table a December hike by the Federal Reserve. There are some equity market subtleties at play this time around though that may complicate things for the US central bank and which are worth considering.
According to forecasts, the US economy added 190k positions in October, above September’s 134k which was the lowest in a year, being impacted by Hurricane Florence. The unemployment rate is projected to remain at the near five-decade low of 3.7%. In terms of the much-anticipated wage growth figures, average earnings are predicted to have grown by 3.1% on an annual basis, reaching a fresh cycle peak, specifically their highest since April 2009. Overall, the prints are expected to come in at relatively robust levels, building on positive momentum generated by upbeat US data hitting the markets recently.
Fed funds futures currently put the odds for a December quarter percentage point rate increase by the US central bank at around 80%. Better-than-forecasted data, especially on the wage front which can act as an inflation driver, can push that probability closer to a done deal, consequently supporting the greenback. Conversely, disappointing numbers could make a fourth hike this year less likely, thus weighing on the dollar. However, there are some complications at play that may lead markets participants to behave differently than just expressed.
The Fed seems to be in the convenient position of being more or less in line with its dual mandate of full employment and price stability; September’s core PCE price index – this being the Fed’s preferred inflation measure – released on Monday, remained at the central bank’s 2.0% annual target for the fifth straight month. Hence the central bank should unequivocally proceed with its rate normalization plans, right? A caveat is in store: the Fed’s unofficial mandate of financial market stability.
Strong wage numbers are supportive of higher Treasury yields. Yield angst was one of the catalysts behind the recent stock market selloff; the S&P 500 is down by around 8% from its record high hit in late September. Should robust readings be associated with a fresh leg lower on Wall Street, then investors may start to believe the Fed will take a more gradual stance on rate normalization, something which is dollar negative. More hints on the weight the central bank currently places on stock market volatility are likely to come during next week’s policy meeting.
In FX markets, an encouraging report that does not spur a stock market selloff is likely to boost USDJPY. If a decisive move above a previous top at 113.16 materializes, resistance to gains may take place around the 114 round figure. Further above, the region around 114.54, the pair’s highest since November last year would be eyed, with the 115 handle coming into scope in the event of an upside break. On the downside and in case of disappointing prints or sharp equity declines that bring to the fore the yen’s safe-haven allure, support could occur around the current level of the 50-day moving average at 112.30. Not far below lies the 100-day MA at 111.66, with the area around it capturing a couple of tops from previous months. Lower still, the zone around the 111 handle which was congested in the recent past would come in focus.
Lastly, the reading on September’s US trade balance will be made public at the same time as the employment report. The relevant deficit is expected to come in at $53.6 billion, its widest since February. Additional attention will be falling on the politically sensitive trade gap with China that touched an all-time high of $38.6bn in August.
