Why Today’s NFP is So Important

Market Drivers July 05, 2019
USD bid ahead of NFPs
GE Factory Orders miss
Nikkei 0.20% Dax -0.30%
UST 10Y 1.96%
Oil $56/bbl
Gold $1414/oz.

Europe and Asia:
EUR GE Factory Orders -2.2% vs. -0.1%
North America:
USD NFPs 8:30
CAD Labor Data 8:30

The dollar was mildly bid higher ahead of the marquee event of the week as traders awaited the key US Non-Farm payrolls release for clues to possible Fed policy changes later this month.

The US NFPs are projected to rebound to 140K from 75K the month prior which would put US job growth back on the steady 150K/month pace and likely keep GDP growth steady. Ahead of the release US 10 Year rates have been battered by risk aversion concerns and hunt to yield sending the benchmark yield to a new yearly low of 1.93% earlier this week.

All eyes, therefore, will be on credit markets to see how bonds react to any possible upside surprises. If the NFPs come in stronger FX traders will be watching the 10Y rate to see if short covering will drive the yield above the key 2% level and more importantly keep it there through the close of trade.

If so, then today’s NFPs could mark a key sentiment extreme in risk trades and lift both USDJPY and USDCHF higher with the former targeting the 109.00 figure and the later gunning for .9900 level. However, this scenario assumes that payrolls will rebound. The risks are certainly skewed to the upside ahead of the release given the sharp selloff this week, but if the number prints worse than forecast it can drag risk aversion pairs to fresh weekly lows as markets will begin to factor in a 50bp cut from the Fed.

As we noted many times in the past, the Fed if loathe to cut rates at all, fearful of using its limited ammunition while the economy continues to expand, but at this point, it has boxed itself into a corner and will likely cut 25bp even if the number proves to be better than expected. However, a decent labor print would allow the Fed to project a “one and done” message to the market and will likely reverse all the excessive rate cut expectations built into the curve. That’s why today’s NFP looms so large. It will either confirm or deny the bond market’s fears that US economy is slowing to a stall.