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Will Friday's US Jobs number jolt markets back into action?


3 June 2021

This Friday will see the monthly employment numbers out from the US for May. The big question on everyone’s mind is will May make up for the very weak April print. Reuters and Bloomberg consensus estimates are expecting 650k and 700k respectively. This is a crucial jobs number after the April Fed minutes raised the specter of an upcoming discussion about tapering, with the momentum on this topic kept alive by FOMC members like Clarida and Daly. Although the US has its own idiosyncratic conditions for policy normalization, it does seem like what others are doing has maybe affected the psyche of the Fed. Norges Bank (Norway), Bank of Canada, Bank of England and the Royal Bank of New Zealand have all turned relatively hawkish which could be affecting the way the Fed thinks about their own policy. This is a really interesting dynamic as the US has typically led G10 FX nations out of recessions in normalising policy.

This jobs number if strong will make April’s look like a once-off anomaly. It will also be key in shaping the market’s tapering and rate hike expectations ahead of the June 16 FOMC meeting. The market has been rangebound recently, searching for its next catalyst to breathe some life back into a whole host of assets.

The answer to whether this is a vol event is not just if it beats/misses consensus, but the extent too and how the market is positioned. Indicators such as declining initial jobless claims and restaurant reservations surging (more restaurant hires) are encouraging with many offering a belief that the risk, or higher probability outcome, lies in a number north of 700k jobs. I think to move the dial and see a reaction in financial markets we’ll need a print of at least 850k+ as well as an upward revision in April’s number. In this scenario, USD shorts and JPY would struggle. While in equity land I'd be looking at financials to catch a bid, with names like JPM a solid place to be long. Alternatively, a weak jobs print would keep pressure on the USD, and see liquidity beneficiaries, like Gold, Crypto and Tech outperform. Another important data point to keep an eye on besides the headline figure is average hourly earnings which would feed into inflation fears. The next US inflation report is out on June 10.

Bond traders will be wary as a robust NFP print could reignite a move higher in yields. To me the risks for a repricing higher in yields seems asymmetric. A disappointment shouldn’t push yields lower by much, but a solid beat could see quite a big sell-off in bond land. The US 5yr Treasury is my preferred guide on how the market views Fed policy, it is currently oscillating between 75bp (or 0.75%) and 87bp. We can look at this as a guide for the USD – if the yield heads higher I’d be taking a far more constructive view on the USD and vice versa. Real yields also seem to be ticking higher, this event could continue that trend. If equity markets sell-off on higher yields we could also see a mild risk-off bid for the dollar. Lastly, net specs short positioning is also quite sizeable on the greenback. 

Price has breached the $1900 level and has remained above this key level for now. The candles with the long wicks tell me sellers are consistently coming in to push price lower. The RSI momentum indicator is deep in overbought territory and has edged down of late, but has turned up today. If the dollar and real yields continues to move higher we could see a re-test of the 200-day SMA and trend line around $1840/50. Gold has run awfully hard over the past 2 months, we could now see profit taking ramped up. On the upside $1915 looks to be a good first initial target.

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