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Massive NFP miss sets up further downside in the US dollar

The two-month revision for the US non-farm payrolls is +134k up from 119k, which is a very positive thing for the payrolls and US employment overall. However, it is very unlikely that we will get an +800k revision next month to keep the trend in play and to make the FOMC feel any more confident that they could taper any time soon.

Market Wrap

There is a lot of head-scratching going to happen over this long bank holiday weekend as the US non-farm payrolls have completely gutted the prospect of a September taper announcement by the FOMC. The Fed will no surely be too worried that a taper and rate hike forward guidance would bring the risk markets down. They will also be looking to the other side of the world where the covid-19 situation is not getting any better and is causing some severe disruptions, especially in China, Japan, and Australasia.

NFP came in at 235k, while the previous month got bumped up above the million marks. US average earnings are positive with a rise to 0.6% above the expected 0.3% and that comes in above the previous reading of 0.4%. Year on Year average earnings was up to 4.3% above the expected 4.0% and the unemployment rate came in at expectations.

So at least those that are working are earning more money. On Monday the supplementary payments to the unemployed are canceled, so more people should have been getting jobs ahead of time, otherwise, there is going to be a severe drag on the economy going forwards and I would have imagined the initial jobless claims data would have been much higher. The labor participation rate looks likely to stay at depressed levels and as this is half of the Fed’s mandate, I don’t see how they are going to be able to do anything. With fewer people at work and maybe more losing their homes as the moratorium on evictions runs out, plus an infrastructure bill and spending bill going nowhere fast, this US administration is really up against it. Core inflation will also come down hard if fewer people can afford durable goods etc., so PCE may fall below 2% in the coming months. The only light would be that the data collected today for NFP does get revised higher and it gets closer to a point where it doesn’t sound so horrific.

The US dollar sold off as was expected and looking at the forex heat-map the AUD and NZD have remained strong with the Canadian dollar also doing well all day. The yen picked up a bid, so I am glad that I didn’t recommend buying the EJ today in the video analysis.

The daily chart for the AUDUSD shows that the pair didn’t quite make it up to the daily 200 ema by the London close but significant progress towards the major resistance levels has been made.

When an asset makes equal highs or lows, this level becomes a major target for me. I now truly believe that we are going to see new lower Los on the DXY and higher highs on the EURUSD. $91.77 obviously had a lot of bids waiting there and there is now a level of liquidity in traders stops that should we close at the levels today, will remain there for the taking soon.

The US services PMI didn’t fall as quickly as expectations had feared but the general theme from around the world is that services are not doing so well now. This is worrying because they were the worst affected by the lockdowns originally. Things are getting so distorted by the pandemic disruptions that the Fed has halted their GDP Nowcast model. "The uncertainty around the pandemic and the consequent volatility in the data has posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges," the official message read.

President Biden who has seen his popularity crater in recent weeks came out today to reassure the public that the American economy is growing at the fastest rate in 40 years. In a spin of the bad employment data, he said the average additional number of jobs over the last 3 months has been 60,000. Which is true, but hardly relevant if next month is also bad.

I am tracking the S&P500 versus the net transfers from the US government as things could change quite rapidly. Ideally in the coming months, we would see positive flows from the blue (fed account) and orange (fiscal) and the S&P500 rising. However, if there is a massive tax hike and the fed flows turn negative as they take more out of the system than they put in that will weigh on the economy. If the US Treasury cannot issue more debt or the debt ceiling is neither suspended nor raised, the year-over-year spending will reduce, and this will weigh on the economic drivers that have been pushing the stock markets higher. This fiscal year’s spending (with one more data point to go) is up to $7.1trln, whereas previous years were $6.8trln and $5.03trln respectively. If that number YoY starts to reduce, I think we will see a major correction. What is needed is for the US government to pass the next rounds of stimulus, but yesterday we learned that Senator Joe Manchin would not back the $3.5trln social spending package, and for it to pass they need all Democrats on board.

The EURUSD found the daily-200 ema and is now setting up for a retest of the breakout level from the falling wedge. If that old resistance now holds for support the draw will be to the liquidity above the 1.19085 level.

The sort of breakout, retest, and continuation trade I am looking for in the ERUSD is playing out currently in the Brent crude market. If this old resistance line can hold, which a weaker US dollar would help, we should get the continuation higher.

The S&P500 made new all-time highs but has struggled with any follow-through as traders close early and square the books ahead of the long weekend.

The Nikkei225 is now much higher than this morning and looks to be targeting the 31,000 level which would be a measured move from the trading ranges it has now broken clear of.

Good news for those holding precious metals came with the weakening US dollar. The more volatile silver broke out of the range and is now looking for the $25 level.

Gold is finding the current swing highs acting as resistance, but a triple top $1834 looks likely to get tested and broken through as soon as the US dollar trades a tad lower.

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