Oct 07, 2022
VOT Research Desk
According to economists, US employment growth will stall in September, reaching 250.000.
The Fed has to experience pain before changing its tight policy and focusing on jobs.
Only one of five scenarios—a sub-100K increase—would remove the dollar from its throne.
There is a possible transaction for each result.
Stock bulls relate to the gym adage no pain, no gain. The Federal Reserve has stated that it is ready to accept—and even desires—economic suffering in order to see inflation decline. The financial markets endured a difficult month, but did American jobs suffer as well?
The headline change in employment is the main emphasis of September’s Nonfarm Payrolls, completely obscuring earnings and other data. I’ll concentrate on the headline and offer five potential possibilities for market responses. First, some context.
Although the Fed no longer mentions a “soft landing,” it still avoids using the word “recession.” It solely discusses growth that is below average and an increase in the unemployment rate from 3.7% to 4.4%. Having fewer workers means having less money to spend, which lowers pricing pressures.
Before, the Fed had high hopes for an improvement in the labor shortage, which was partially tied to the “Great Resignation” phenomena. Hope for a decrease in inflation was also borne by the untangling of supply-chain problems. That also didn’t take place. The extremely high core inflation rate of 0.6% MoM in August has persuaded policymakers that pain is necessary. The job market has not at all demonstrated any signs of unease. For the sixth time in the first eight months of the year, the US added 315K posts in August, exceeding estimates.
Potential nonfarm payroll scenarios
Significantly above Prediction: it is possible that a jump of more than 400K positions will cause the dollar to rise and the market to decline. No less than 526K new jobs were added to the American economy in July, and the somewhat slower growth in August could well be an exception. Selling AUD or NZD would be effective in this situation, comparable to scenario #3, which is the exact opposite of this one.
Below even expectations any move below 100K would already be concerning for the US economy, causing the currency to fall and equities to soar. The impact would presumably be felt for a longer period of time and would not be viewed as a singular occurrence. If the US reported a loss of employment, which is quite improbable, it would make the situation worse. Purchasing risky currencies like the AUD/USD or NZD/USD could pay well. They frequently increase along with equities.
Beyond predictions: In the current unstable market environment, a result of 200–300K would be seen as within expectations. It would suggest a slower but still strong rise of US employment. Investors would probably sell equities, which would moderately increase the value of the dollar.
The critical inflation data due out the next week would swiftly come into focus as the true determinant of what to do next. The most clear reaction to such a result would probably be in USD/JPY.
An overview The Fed’s second objective is full employment, so markets would be significantly impacted by labor market distress as it concentrates on inflation. With the odds remaining stacked against shares and in favor of the dollar, the stock market and dollar are poised to react to any decision.
