Soft ahead of Payrolls data – Scotiabank

It’s payrolls Friday. The USD is soft on the day, but trading off its earlier lows, while stocks are broadly lower and major bond markets are firmer, driving 10Y yields 3-4bps lower. The morose risk mood reflects slowdown concerns ahead of the jobs data but after Fed Chair Powell’s Jackson Hole comments effectively signaled the Fed’s readiness to start cutting rates, payrolls is the data point that many think determines whether the Fed easing cycle will start with a 25 or 50bps cut on the 18th, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

Market awaits US jobs data for guidance on Fed

“The market consensus anticipates OK data—a 165k gain on payrolls and a minor nudge lower for the unemployment rate to 4.2% in August. Scotia is a little below the consensus at 140k. Outcomes in those sorts of ballparks are probably not enough to persuade policy makers that a 1/2-point cut is warranted. A 165k gain is still a bit lower than the 3m average payroll gain and whether it’s a 4.2% or 4.3% may come down to rounding, however.”

“Weak ADP data, soft JOLTS and a sluggish Beige Book suggest some risk of disappointing data overall. A NFP gain closer to July’s 114k would tilt risks more strongly towards a 50bps ease. Markets have priced in around 35bps of easing risk for the September decision and soft data will add to front-load easing expectations but likely not add to the 100bps of anticipated Fed easing already reflected in swaps for the balance of this year.”

“Note that we will get near instant Fed reaction to the jobs data from Fed Governor Waller who speaks at 11ET. With the recent consolidation in the USD relieving its generally oversold condition to some extent, weak data will likely drive the DXY towards the 100 level. On expectations or better will lift the DXY as the Fed easing risks reprice away from the 100bps of cuts currently factored in and pull the DXY higher to the 101.50/102 zone.”