Today the event of the day could be the publication of data from the US labor market. They may influence the financial policy of the Federal Reserve, including the timing of tapering and interest rate hikes.
The US economy added probably 750 thousand jobs in August. The labor market appears to be continuing its recovery, although Wednesday's ADP report somewhat undermines that thesis. A reading of 750k would mark the lowest job growth in three months and a shortfall of 5 million jobs by the February 2020 employment peak.
Employment in the education sector is the biggest contributor, although job growth in the leisure and hospitality sector likely moderated due to lower demand for travel and leisure activities due to the spread of the coronavirus. Investors will be watching the NFP report closely to assess the tapering outlook. A strong reading would support the Fed's commitment to begin cutting stimulus this year, while a weak reading like ADP could push back monetary policy normalization to 2022.
Three scenarios for the dollar
The results from the Bloomberg survey range from 400,000 to 1 million new jobs. If the data come out clearly above expectations, they could strengthen the USD, lead to an increase in bond yields, negatively affect e.g. gold quotations. On the other hand, much worse data could weaken USD, lead to a decrease in profitability and increase gold prices. Data in line with expectations could change little on the markets, where implied volatility for one-year options on EUR/USD pair dropped to the lowest level since the beginning of March 2020.
China is losing momentum. Will it do the same in Europe?
In China, the Caixin China General Services PMI fell to 46.7 in August 2021 from 54.9 in the previous month. This was the first decline in service sector activity since April 2020, amid a surge in Covid-19 cases in some parts of the country. New orders contracted for the first time in 16 months, while employment fell for the second time in three months.
Input prices rose slightly due to higher personnel costs and increased transportation charges, while output prices declined after rising substantially in July. Looking ahead, confidence remained upbeat, although the degree of positive sentiment fell from July and remained below the series average.
The data from China may be important insofar as it is a kind of indicator of what may lie ahead for the US and Europe, where sentiment is very good for now. However, if they start to deteriorate, the picture for the Eurozone economy this winter could look dire. PMIs below 50 points with the inflation record through the base effect of November 2020, which would be the first step to potential stagflation.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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