Calm before the storm: Why today’s NFP report matters more than most
In the absence of any clear forward guidance from the Fed, this afternoon’s US payrolls report bodes to be a high volatility risk event for markets.
Highlights:
- US NFP report set to be a high volatility event in markets on Friday.
- Fed September hike seen as a coin toss amid vague Warsh communications.
- US and Iran edge close to Hormuz agreement – talks in the “final stages”.
- Euro Area retail sales data fails to meet expectations.
- Sterling range-bound amid lack of data or policy news.
Kevin Warsh’s reluctance to give markets even the slightest hint about the path of US rates has muddied the waters for investors. With no clear central bank rhetoric to lean on, economic data takes on outsized importance, none more so than the first-Friday-of-the-month nonfarm payrolls report. Our call from earlier this year that these reports would bring higher currency volatility under Warsh’s stewardship now appears to be the consensus view, and it will be put to the test later today. Futures currently see a September Fed hike as essentially a coin toss, so even modest surprises in either direction could move the needle in a meaningful way.
The other key risk heading into the weekend is the ongoing US-Iran negotiations. Signals earlier in the week suggested a deal might already be done; that it isn’t shouldn’t be read as a major setback, as the latest comments point to an agreement being close, with talks described as in their “final stages” by a senior Iranian official. If past patterns hold, we could see news break over the weekend of a narrow Hormuz shipping agreement. While that could spark a mild bout of riskon trading, we think much of the good news is already priced in.
USD
The dollar loitered around three-week lows against its major peers on Thursday as investors awaited news of a deal to reopen the Strait of Hormuz. President Trump has said a deal is imminent, though investors have learnt all too well not to take his comments at face value. The key sticking point appears to remain whether Iran will be willing to relinquish control over traffic through the Strait. The longer a deal remains elusive, the more likely the dollar is to catch a bid – but for now, market participants seem content to stay upbeat.
Iran war aside, all eyes now turn to this afternoon’s payrolls report for July, which takes on huge importance given that markets are completely torn down the middle as to whether or not the Fed will raise rates in September. Consensus points to no change in the unemployment rate and a job creation number around the 80k mark. While we think that this would be solid enough to confirm that the jobs market remains in a “low hire, low fire” state, we do not think that it would be enough to validate the hawkish dissenters at the July FOMC meeting. Instead, a print in that range would likely reinforce the case for patience, shifting the market’s focus onto developments in the Iran conflict and the upcoming CPI prints.
EUR
Yesterday’s Euro Area retail sales print for June was a disappointment. Sales unexpected fell by 0.3% month-on-month (+0.1% consensus), while the annual number eased to 0.7% – the slowest pace of growth in almost two years. The details of the report were not particularly encouraging either, as the weakness was broad based, rather than confined to one or two categories. Still, we’re wary of overreacting to one month’s data, especially with the broader run of economic figures holding up reasonably well.
These is no data of note set for release today, so we expect to the euro to take its cue entirely from this afternoon’s US payrolls report. News of a deal to reopen the Strait of Hormuz could be mildly bullish for the common currency as and when we get it though, as we noted on Wednesday, any upside here could be limited given that a lot of good news already appears to be priced in by markets.
GBP
The pound has traded range-bound against the dollar so far this week amid an absence of market-moving news. With Prime Minister Burnham already away enjoying sunnier climes merely a couple of weeks into the job, and MPs in summer recess anyway, the barrage of policy announcements from the new administration has come to an abrupt halt. Investors have also had no major economic data to digest, with the revised services and composite PMI figures barely changed from their initial estimates.
Next week looks set to be moderately more eventful, with the first estimate of second quarter GDP growth closely watched on Thursday. We expect a fairly marked slowdown from the strong 0.6% quarterly print in Q1, not least due to the disruption caused by the Iran conflict, which is seen to have weighed on business confidence and pushed up imported price pressures in the past few months.