Choppy trade leaves markets eagerly awaiting NFP.

Headlines

* Stocks erase losses as Treasury recovery continues

* NFP job gains are expected to moderate but still remain relatively hot

* USD slides further supporting yen and activity currencies

* Oil slump deepens below $83 with focus on demand

FX: USD traded mixed and eventually sold off as yields retreated modestly for a second day. The move in bond markets has been so fast and sharp that there is an increasing risk of something breaking and a hard landing. But for now, high yields and wide rate differentials may underpin support for the dollar. We need to lose 105.50 on the DXY to change the long-term uptrend so any pullbacks are bullish consolidation.

EUR is up for a second day and holding above 1.05. ECB officials were on the wires and had mixed views. De Guindos warned about high inflation while Kazimir reiterated that the tightening cycle had peaked. A bullish morning start candlestick pattern could signal more gains up to 1.06 near term. It’s all down to the NFP.

GBP picked up from yesterday and is trying to move above 1.22. Much weaker than expected construction PMI data didn’t trouble buyers. The outside candle that printed yesterday is also a relatively bullish signal.

USD/JPY is enjoying some mild respite from ramping Treasury yields which have pulled back after hitting 16-year highs on Wednesday. The major printed at 150.16 on Tuesday. All eyes are on NFP where strong data would push the major back into intervention territory above 150.

AUD popped up to 0.6377 before pulling back as equities sunk. USD/CAD pushed above strong resistance around 1.3667 to a new high at 1.3785 before closing lower. Prices were overbought as the major contends with both US and Canadian jobs data later today. We note that the strong loonie/crude oil correlation has picked up this week in contrast to medium-term trends which had generally softened.

Stocks: US equities closed in the red modestly in choppy trade. The benchmark S&P 500 lost 0.13% to settle at 4258. The tech-heavy Nasdaq finished 0.36% lower at 14,723. The Dow outperformed settling just 0.03% down at 33,1119. The easing in yields helped sentiment. But weekly initial jobless claims rose less than expected which is another sign of labour market strength and hawkish for Fed policy.

Asian futures are up due to a slightly more improved risk mood. APAC stocks traded higher Thursday due to falling yields and the weak ADP jobs data. The ASX200 was led by gains in yield-sensitive sectors like tech and real estate. The Nikkei 225 outperformed on bargain hunting and ended a five-day losing streak.

Gold made fresh cycle lows at $1813. It is due to record its ninth straight day of losses.

Day Ahead – NFP Day

The first Friday of the month means the release of the monthly US employment report. The headline print is forecast to rise by 170k from August’s 187k. Note there have been three straight downward revisions to the headline print since the July release. Average hourly earnings are seen ticking up one-tenth to 0.3%. The annual figure is expected to match the prior month’s pace of 4.3%. The jobless rate is predicted to tick down to 3.7%.

This is the last non-farm payrolls data before the next FOMC meeting in the first week of November. These figures, along with the inflation data, will be used to determine if rates are sufficiently restrictive. The disinflationary trend is well entrenched, though higher oil prices may slow it down. But the focus is on how hot the labour market is. A slowing in the recent moderation could increase the market odds of one last rate hike by year end. Markets only give that around a 35% chance currently.

Chart of the Day – Gold suffering from high yields

Gold has had a traumatic few days, now down nine days in a row and close to 6%. The precious metal is off more than 12% since its May highs above $2000. The higher-for-longer Fed rate stance has put major pressure on bullion. This has caused yields and the dollar to surge, which is a toxic combination for non-interest-bearing gold. ETF holdings have taken a similar battering since May, while bullish futures positioning has cut bets to a five-week low.

A strong NFP report will support the Fed’s current hawkish stance to keep policy tighter for an extended period. Near-term support is now at the February year-to-date lows at $1804. Below is the next long-term Fib level (61.8%) of the October 2022 rally at $1787. Resistance above is the midpoint of that uptrend at $1840. 

(Sources: vantagemarkets.com)