Equity markets are on course to spend a third day in the red despite a strong start to the week as investors adopt a cautious approach ahead of the US jobs report.
Amid all of the chaos this week, investors have always had one eye on the jobs report later today. Even earlier in the week when equity markets were rallying strongly, there was always a sense that the jobs report could spoil the party.
And not because it could point to cracks appearing in the labour market; quite the opposite in fact. The rally was apparently triggered by weaker US economic data, notably the manufacturing PMI and JOLTS job openings, the latter of which was a particularly large miss. The idea being that if the economy is suffering under the weight of rate hikes, the Fed may ease off the brake. If I sound sceptical, it’s because I am.
The services PMI and ADP payrolls number did that theory no favours and I’m not sure the jobs report today will either, hence the apprehension. The labour market until now has been very resilient and while cracks appearing will get the attention of the central bank, it will take much more than that to force it to slow down. What’s more, without inflation indicators consistently pointing to lower price growth, policymakers will be hesitant to ease up sooner.
Which brings us to today’s jobs report. The Fed still hopes to engineer a softish landing that does minimal damage to the labour market but it will sacrifice this aim in its mission to control inflation and get it back to target. So the most important aspects of today’s report are hourly earnings and participation, barring a sudden unexpected spike in unemployment that generates some labour market slack.
A continued easing of hourly earnings and an increase in participation are more likely that a sudden spike in unemployment. If either happens, investors may board the risk train once more and ride the equity market rally into the weekend. Another hot jobs report though could achieve quite the opposite, suggesting the Fed has a lot more work to do and have investors running for cover.
Will Japan be tempted to intervene again?
While much of the focus today will be on the US fallout of the jobs report, other countries will also be affected as they battle rapid depreciation against the soaring dollar. Japan is right at the top of that list and a hot jobs report today could be the catalyst for another round of FX intervention. The decline in foreign reserves in September was the largest on record, in part due to the intervention two weeks ago.
The yen is trading at 145 to the dollar, just shy of where it intervened in September and around the level the BoJ conducted a rate check the week prior. A hot jobs report could see that spike once more and the Ministry of Finance and BoJ will be ready to act. Whether they’ll be willing to or not may well depend on the outcome of the report and whether it breaches a threshold the MoF deems too far. Markets will no doubt be on high alert.
Has bitcoin formed a bottom?
Bitcoin continues to hover around $20,000, a hugely important psychological zone for the cryptocurrency. Often in markets, we talk about key levels or areas but with bitcoin, it’s spent most of the last four months fluctuating around $20,000 with a healthy margin for error on either side.
While there may have been concerns when it dipped below or excitement when it rallied above, it could be really important for Bitcoin that it has found a base around $20,000 that traders are seemingly comfortable with in these turbulent times. It now looks like a very strong region of support that’s been reinforced with every test below. There may well be a case that a bottom has formed. Of course, another risk-off panic would quickly put that theory to the test.