Market Overview

7 August 2020

Non-Farm Payrolls Data May Prompt Hard Times for the Greenback

The Nasdaq 100 futures for the U.S. hi-tech sector composite index reached a new all-time high again last night. This time the quotes touched the 11290 points area after the previous high around 11155 just on Tuesday. While many experts from various investment funds are continuing to talk on whether a "V-shape" recovery would take place, or maybe not, in the U.S. or global economy, major U.S. financial indexes have finished drawing their right half of the same "V-letter" on charts. 

The contradictory point is only that the Nasdaq 100 chart has the right stick from the V-letter much higher than the left stick, whereas the S&P500 broad market index only ends the right stick almost equal to the left stick, at least for now. In any case, the story about the difference between the left and right sticks on the stock charts already awakens the imagination and expectations of investors, perhaps, even stronger than the story about the left and right sticks of Twix chocolate bars, which was exciting for children. 

The top five companies of Wall Street by capitalisation include Amazon, Apple, Facebook, Google and Microsoft, which together contribute approximately 20% to the growth of the S&P500 index. But, still, this is not enough to raise it to the present Nasdaq sky values until the movement is actively joined by the main peloton of the market. However, it was not only the latest hi-tech companies’ highs that was forming the drive for yesterday's movement. In anticipation of Friday's main U.S. jobs report with non-farm payrolls numbers, it is important for many stock investors to see the jobless claims figures too. 

Some of them are worried that the recovery of jobs has lost momentum over the past month, especially after the Automatic Data Processing (ADP) preliminary estimates showed on Wednesday that only 167,000 new jobs were actually created in July vs the average expectations of more than 1.5 million people in the United States to return to work. A dramatic change, but most of the market does not believe in it. After 4.8 million jobs were fully restored in June, when everyone who could immediately put his or her best foot forward into offices or factories, it's quite natural to expect some lower numbers in the next month. But not to the extent that would be 28 times less than in June... 

So, the "official" expectations, according to Reuters or Bloomberg polls, are still about 1.6 million jobs on average in today's report. Unofficially some "old school" traders are looking forward to the actual gains of 2.5 or even 3 million jobs that could be announced immediately as being "better-than-expected", which could add the drive for the next ascending wave of the U.S. and global stock indices. This point of view, which is not necessarily true, but representing one of the possible scenarios, was strongly supported by Thursday's data. 

Initial claims fell to 1.186 million for the week ending August 1, which is about 0.25 million decline from the same period during the previous week , and the four-week average on initial claims at 1.338 million claims also signalled some modest improvement in the trend. Continuing jobless claims at 16,107 million was also much better than more than 17 million claims a week before, and better than the average expert expectations at about 16.7 million claims. “Initial claims for the Pandemic Unemployment Assistance program also posted the biggest weekly drop since late May. Continuing claims for the week ending July 25 more than reversed the prior week’s rise. In short, new layoffs and the ranks of the unemployed remain strikingly high, but today’s report alleviates concern that the jobs recovery has gone into reverse," experts at Wells Fargo wrote. 

“There remains a massive degree of uncertainty around estimates for payrolls... given the fast-moving and unprecedented scale of changes in the labour market in recent months," they added in a research note. But at least one affirmation can be said for sure. The direct reaction of major reserve currencies in the forex market after the release of "bad" numbers by ADP on Wednesday was partially aimed at purchases of the U.S. Dollar, while the "good" numbers of jobless claims on Thursday, on the contrary, caused a test of nearest resistance levels for EUR/USD, AUD/USD and NZD / USD, as well as another jump in prices for gold contracts. In other words, a fundamental pattern works in a way when any "that's all right, mama" signals are felt by the market as a kind of "self-permission" not to buy safe-haven U.S. bonds right now, because they are not attractive from the income point of view. The strong demand for the U.S. Treasuries and for the U.S. Dollar comes only when investors taste a bite of the bitter reality sandwich. 

Thus, it is worth taking into account also the described perversion of distortion of the real and imagined market expectation seriously. Also it's reasonable to keep in mind the possibility of "worth-than expected" or "bad" data from the labour market today that may turn bad only for stock markets. But, the same "bad" data are "good" for the U.S. Dollar safe-haven prospects, and therefore, they could provoke additional profit-taking in the main currencies, which have grown significantly over the past four weeks. Although a moderate profit-taking may still keep the general anti-Dollar tendency of this summer alive, the situation with "bad" data could provide some technical downside correction in EUR/USD or AUD/GBP etc. But in baseline scenarios with "pretty good" or "normal", or even "much better-than-expected" jobs numbers, they are "good" or even "excellent" for the S&P500 index or for the Nasdaq futures. The same baseline data represents another bearish trap for the Greenback that could give another heave-ho to the U.S. Dollar to continue its summer downtrend.

 

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