How The Markets Will React to The Next NFP Report?

US Politics Confusing The Markets

It is not a secret that since Trump inauguration, the markets are facing big turmoil. Unrevealed tax plan, consecutive executive orders, Fed – White house foreseeable conflict and fears surrounding European elections, are all fundamental factors causing the markets a lot of disturbance.

Number of FOMC participants’ assessing uncertainty and risk around the GDP raised from 1 to 6 members this month. On the same level FOMC participants voted for employment uncertainty raised from 1 to 5. Very low volume on US stocks and USD pairs consolidation are the main outlook on the markets.

NFP in Prospect

Job creation is the foremost indicator of consumer spending. Every analyst is monitoring the employment data this week closely, as these numbers will give them a clearer outlook for the next Fed rate hike. Expanding NFP means growing inflation, which will lead to imminent interest rate raise. Fed rate raise expectations reached around 95%. John Wraith (UBS head of UK macro rates strategy) sees that the wheel of consumption was week last quarter; however, he expects couple of rate hikes during this year.

ADP which comes two days before the NFP is usually used as the estimation for the NFP. Numbers released in February shows a great raise in employed people during January, 246K actual number Vs 165K estimated while December numbers was 151K. The ADP forecast numbers for this month are 190K which will be a big disappointment for the previous month numbers.

Some economists believe that unemployment shows the bigger influence on markets for the long term. Last month unemployment rate was 4.8% Vs 4.7% forecasted, it is forecasted to be 4.7% next month. Average hourly earnings has been under spot light previous months, last month it raised 0.1 more than its prior which was 0.3.

Markets are waiting the ADP on March 8^th to forecast the NFP which will arise next day. ADP and NFP has shown a very close movements.

Markets on Thursday

EUR/USD – Suffered the consolidation during the previous months as it lacks for motivation and controlled by fears. Over estimated NFP will cause the pair to drop. I don’t expect a down trend for the pair further than 1.044 as it is a very strong historical support level. However, the pair will be thrilled to hear NFP and unemployment disappointing data due to the big amount of swaps occurred after the Greece news in Early in February. In such case the pair will retreat to 1.064 and might rally the next week towards the 1.0825.

The most critical situation occurs when the NFP released number is contradicting with unemployment rate, in such case I prefer to stay out of the market as the pairs will be so volatile as many trades don’t recognize the true direction of the USD. Markets usually focuses on the unemployment rate more than NFP for the long run trades, if the NFP numbers are more than expectations but under its previous month.

USD/JPY – same script for the Yen pairs generally and the USD/JPY specially. In case the employment data are better than expected Yen pairs are more welcoming to bull as news coming out of Japan showed fragility. Japanese adjusted trade balance (the most important japans indicator for my perspective) was 0.16T against 0.33T prior month and 0.28T forecasted. Also trade balance showed results in negative not shown years age, -1087B Vs -637B forecasted and +641B for the previous month. USD/JPY will soar to 115.5 to be the first pair getting out of the consolidated view.

Gold – Has started to bull back two weeks ago, trading currently at 1217. Unlike the USD pairs, gold started its retreat two weeks ago under strong technical indicators that it will continue on the medium term downwards.

S&P 500 – Previous week was bearish for all US stocks. Good employment data don’t guarantee long run bullishness for US stocks as the charts show low levels of volumes. On the other hand any correction caused by weak employment news on Friday would be very good as buying opportunities. The S&P 500 last correction was shown on January 2009, low stock volumes are showing that sellers are waiting for their move.