📢How strong is the US labour market?

🔜NFP report will be released at 1:30 PM BST

The US labor market has performed well this year, even as the US economy enters a technical recession. Nevertheless, the Fed has been raising interest rates since March and at some point higher rates should limit growth. The latest NFP report brought more than half a million new hires and changed market expectations about Fed future moves. Meanwhile, a fresh ADP report pointed out that employment growth will  be the lowest this year? Will worse data have any impact on the Fed?

Solid sub-data

• Recent publications support a strong reading of NFP. Initial jobless claims began to decline - the 4-week average did not exceed 250,000, while previously speculated that jump above 300,000. will indicate a real recession.
• The employment sub-index of the ISM manufacturing index jumped to 54.2 points, the highest since March. Industry is the engine of the economy, so if there are no weaknesses in this segment of economy, it is difficult to expect a real slowdown.
• Seasonality also points towards a solid NFP report. August is one of the best months of the year in terms of employment growth. Moreover, statistically, in most cases, August was better than July. We should not count on that today, but a solid report cannot be ruled out. Goldman Sachs still sees an increase of 350,000, which is above market consensus of 300,000. However, bank indicates that the seasonal adjustment is as high as 150,000.
• JOLTS - we had 11.2 million vacancies in July, more than 11 million in June. This gives us about 2 vacancies per unemployed person!

What indicates a poor NFP reading?

• The first ADP reading since June showed an increase of 132k. Theoretically, the new ADP methodology is supposed to better reflect reality
• Jerome Powell during his speech in Jackson Hole pointed out that the Fed's policy will hit the labor market. Most likely this is not the case yet.
• Recently, many companies, including Ford, Citi, Snap, T-Mobile and Tesla, have revealed plans to lay off large numbers of employees. On the other hand, unemployment benefit claims remain low.

What else should you pay attention to?

Today, a slight increase in wage dynamics to 5.3% YoY is expected from 5.2% YoY. It is still well below this year's peak of 5.7% YoY, but an increase to 5.5% YoY would be considered very hawkish. In addition, the unemployment rate should remain unchanged at 3.5%

How may the market react?

Regardless of today's readings (unless there is a clear drop in employment), the Fed will not change its policy. If employment rises by only 100,000, there is a chance for a recovery on Wall Street or a weakening of the dollar. Most likely, however, the movements will be short-lived. On the other hand, if the report will match or beat estimates, the dollar should gain and the S&P 500 should lose significantly. However, one need  to remember about possible profit taking after the publication itself. Ultimately, however, the S&P 500 or EURUSD should return to the latest trends.

EURUSD

EURUSD is moving in consolidation. Both levels of consolidation should drive investors today to take profits after reaching either level. However, strong data may eventually drive EURUSD below 0.99 level. Source: xStation5

US500

Potential morning star may be forming on the D1 interval and a really weak NFP report could provide more fuel for the bulls. On the other hand, the strong supply zone is located around 4025-4070. If the report  beats market expectations, it is possible to test the 61.8 retracement. Source: xStation5