Risk aversion is the order of the day in the financial markets as investors eye the US jobs report as a big risk event given what the outcome could mean for interest rate expectations this month. The topic of interest rates is likely to be hotly debated when the Federal Reserve meets in a little under two weeks and the decision currently appears to be on a knife edge. Stanley Fischer, vice Chair of the Fed, admitted last week that the data between now and the meeting may sway the decision one way or another.
Of course, that doesn’t mean that today’s data alone will make the difference but it is one of the more closely followed data releases. Given the volatility and uncertainty in the markets right now, associated with China, I would assume the Fed is probably leaning towards keeping rates on hold at the September meeting, as it stands. With that in mind, a poor jobs report would probably have a greater bearing on the decision than a good report. A very strong report – around 300,000 jobs added and good wage growth – would probably ensure a lively debate and certainly put a hike firmly on the table.
The key question in a couple of weeks will be whether the Fed sees inflation returning to 2% within its forecasting period and if so, what are the risks of it accelerating to the point that a number of rate hikes are required in a relatively short period of time. This is the argument behind the decision for a rate hike this year. What the Fed needs is further evidence of a tighter labour market and wage growth before it can be confident that future inflationary pressures exist.
The safe haven trade is certainly prevalent in the currency markets with the euro and yen once again being favoured by traders. The yen in particular has benefited greatly from this in the past week or so and looks likely to continue to be favoured going forward. It’s going to take something very substantial to make the markets more hawkish on September which doesn’t offer much support for the dollar in the short term. A weak report could bring some bearish moves in the greenback which has actually fared quite well in the last couple of weeks.
The sell-off in equities is fairly broad based this morning which supports the view that this is a risk averse play rather than there being a specific driver behind the move i.e. China. This means that a weak jobs report, which would be viewed by the market as dovish, could prompt a reversal in equity markets and help them end the week on a more positive note. Equities have benefited to an extent at the end of the week from the bank holiday in China with markets in the country being closed. It will be interesting to see how they trade into the close today, with Chinese markets reopening next week before the start of play in Europe and the US. In fact, the latter is closed itself on Monday so investors here won’t get the chance to respond to any early week moves until Tuesday. That in itself may prompt some risk aversion from investors.
The risk-off mood is doing nothing for commodities today, with small losses being seen across the board. Gold stands to gain the most from a weak report on the back of a weaker dollar and the delay that could bring to a Fed rate hike. Gold responds strongly to changes in inflation and interest rate expectations and an interest rate hike would likely weigh on inflation going forward as a result of the stronger dollar that would be expected to accompany it. Oil could suffer in the case of a poor jobs report, despite the support it may receive from a weaker US dollar. A weaker jobs report would call into question the strength of the US economy which at a time of slower global growth, is just another kick in the teeth. The supply side of the story is the key driver behind oils decline but questions over demand from China are also weighing. If the US is seen to be stalling, this could weigh further on oil prices into the end of the year.
The S&P is expected to open 27 points lower, the Dow 205 points lower and the Nasdaq 53 points lower.
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