Market alert: NFP report crucial for the EURUSD, stocks

The markets are sure that the next move from the Fed will be a cut in interest rates. In fact such cut is fully discounted by September and seen by many as soon as this month. In this context, the labour market developments might be decisive for major markets like EURUSD or US500.

Summary:

  • US500, EURUSD await decisive NFP report
  • ADP, ISM offer contradictory suggestions regarding labour market
  • Data will be released at 1:30pm BST (14:30 CEST)

US500  

Let’s start from stocks. US500 saw a major correction in May as trade conflict erupted but has recovered substantially in June so far on the rate cut hopes. Lower rates are naturally good for stocks but only if economic conditions are good. Here’s the catch. Strong employment gain could delay rate cut decision but would at least sooth slowdown concerns. Weak print (below +100k) could seal expectations for an imminent rate cut but investors could be worried that once again such cut would only confirm a looming economic slowdown (over the past 3 decades a beginning of easing cycle always preceded economic slowdown).

Looking at the chart the index returned above the 2800 level which once again serves as a support. The next resistance is at 2870 points – a reversal below that level could confirm a downward trend.  Source: xStation5

EURUSD

The European economy started to disappoint in early 2018 and for many months the US economy was in a much better shape and that translated into persistent EURUSD decline. However, as the fiscal impulse in the US economy starts to fade, the latest reports have been disappointing as well. If the US labour market softens, that would be another sign that the US “converges” with the EU in terms of weak economic conditions and that could have serious ramifications for the EURUSD.

EURUSD broke out of the downward wedge and quickly surged to 1.13, showing determination of the bulls. One may notice that the real support is as far as 1.1515 with a weaker level at 1.1425. Therefore a weak NFP could be a mover on this currency pair. Source: xStation5

Can we predict the NFP report?

In June we are in a good situation – all the “minor” reports like ADP and ISMs for May have been already released. The problem is that they pointed at a completely different direction. The ADP was the weakest since March 2010, showing just 27k employment gain in the private sector. ISM employment composite (we use 15% manufacturing and 85% non-manufacturing) was at 57.4 points – the highest since January, up 3.9 points from April. It was also only the 8 month with a reading of at least 57 points in this decade! Which measure should we trust?

ADP has shown a fairly strong correlation with the NFP, especially when it disappointed. Source: Macrobond, XTB Research

On the chart we can see a stronger correlation with the ADP but one can see that on month to month basis these measures were often quite different. There were 5 situations over the past 9 years where the ADP was lower than +90k. The average private NFP was just +72k in such month, 4 out of 5 were below +100k and the best reading was +130k. So the predicting power of a poor ADP seems to be strong but the sample is low.

ISM surveys have overstated employment gains recently. Source: Macrobond, XTB Research

On the chart of private NFP and the ISM composite we can see that the correlation was strong in the first part of the decade but recently the picture shown by the ISM was generally overstated. Also in 7 months where the ISM was above 57 points the average private employment gain was at +208k, just 10k above the mean for the past 9 years. There has been no situation during this decade when the signal from ADP and the ISM would be so conflicting so that will be a precedent. Finally, May has been a below-average month during this decade so it looks like a weak NFP reading is a bit more likely. However, this is very volatile number (and often revised) so investors should be ready for any outcome.    

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Morning wrap (30.11.2020)
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