NFP React: What economic slowdown? Jobs Shocker supports Fed 75bp argument for September, Stocks drop, Oil pares weekly losses, Gold rally ends, Bitcoin equity correlation ends

The July nonfarm payroll report delivered a juicy plot twist in the Wall Street’s Fed pivot playbook.  Stubbornly high inflation and a global economic slowdown was expected to drag down the US economy, but after today’s jobs report that does not seem to be the case. Fed officials were already pushing back on the idea of a Fed pivot and now it seems they will be debating whether they need to be even more aggressive to tackle inflation given how strong the labor market is performing. 

US stocks plunged after a robust employment sent Fed rate hike expectations higher. The stock market was too optimistic in feeling confident the Fed only had a full-point in rate hikes left in them before they would keep rates steady.

NFP

This nonfarm payroll report was a gamechanger for Wall Street.  Robust job growth and accelerated wage gains confirms the US economy is not in a recession and paves the way for continued massive rate increases.  The labor market is still very tight after nonfarm payrolls surged 528,000 in July, more than doubling economists’ expectations.  The unemployment rate ticked lower to 3.5% as the labor participation continues to dip.  Wages continue to rise and that will further fuel inflation worries.  Employment is back to pre-pandemic levels and it looks like it is not going to stop there. 

A September Fed pivot is completely off the table and the risks of a full-point rate hike could grow if the next two inflation reports remain hot. 

FX 

The reaction to a shockingly impressive payroll report was a surge in Treasury yields that bolstered the dollar. King dollar is here to stay as the debate for higher Fed rate increases will likely be supported by the next round of inflation data.  The euro defended parity against the dollar, but it will be hard for that to last as the interest rate differential will continue to widen more to the greenback’s favor and as the global economic slowdown will lead to more safe-haven flows.

Oil

Oil prices are finishing on a strong note after a week filled with global recession fears destroyed the crude demand outlook.  A robust nonfarm payroll is welcome news for the US economy and that is helping oil pare some of this week’s losses. Europe also posted better-than-expected industrial production data from both Germany and France.  Despite all the global economic slowdown worries, the oil market is still tight.

A surging dollar and rising risk that the Fed may need to be more aggressive with the tightening of monetary policy is unnerving some energy traders. With Saudi Arabia and the UAE saving their emergency oil capacity, further downward pressure might be limited.  The oil market remains tight and if today’s bounce off major technical support (200-day SMA) lasts, prices could stabilize above the $90 level.

Gold

Gold’s rally might be over now that Wall Street needs to have a reset with their Fed rate hiking expectations.  The July nonfarm payroll report was a shocker that has sent Treasury yields soaring, which is kryptonite for non-interest-bearing gold.  The next couple of weeks will truly test if gold is a safe-haven again. Bullion traders now have two big questions: How much higher will the Fed take rates? Can gold rally alongside a strengthening dollar? 

The next inflation report will be key for determining if a 75-basis point rate hike will fully be priced in, but if we see a much hotter-than-expected report some might argue for a full-point at the September FOMC meeting. 

Bitcoin

Bitcoin might be ending its correlation with equities.  After a robust nonfarm payroll report, Wall Street sent Treasury yields skyrocketing, which sent stocks sharply lower, but not Bitcoin.  If we were still in a crypto winter, Bitcoin’s typical reaction would have delivered a steeper drop than what happened with US stocks. If Bitcoin can hold onto the $23,000 level, that could be very promising for the medium-term outlook.  Bitcoin has been stabilizing here and could see further bullish momentum on the break of the $25,000 level.   

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya