As we work through the last of the “dog days of summer” (in the Northern Hemisphere at least), traders and portfolio managers will soon return to their desks in earnest for the busy Autumn season, and that means a renewed focus on the Federal Reserve and its policy normalization plans.
As we noted on Friday, Fed Chairman Powell struck a cautious tone at his highly-anticipated Jackson Hole speech, warning against the risks of premature policy tightening and reiterating that there was still “much ground to cover” for the US economy to reach maximum employment. Most traders viewed this speech as likely precluding a taper announcement at the central bank’s September meeting, leaving the market focused on the Fed’s November policy meeting, a full three Nonfarm Payroll (NFP) reports from now.
Nonetheless, Powell’s emphasis on the labor market and his ongoing assertions that price pressures will be “transitory” means that the monthly US jobs reports may be the most important regularly-occurring economic data for traders to watch in the coming months. We’ll have our full NFP preview report live on Thursday, but we wanted to highlight one of the key leading indicators and identify a key market to watch through the whole week as readers prepare for the key US jobs figures.
One key indicator that points to a solid print on Friday is initial unemployment claims. As the chart below shows, the 4-week moving average of new unemployed Americans has fallen to a post-pandemic low of 366k after stalling around 400k for the past two months:
Source: FRED
With (marginally) fewer Americans losing their jobs over the last month, there may be some potential for Friday’s NFP reading to beat the consensus estimate of around 750k net new jobs. We’ll have a full breakdown of what this data and other reliable leading indicators mean for NFP on Thursday.
Market to watch: USD/JPY
We’ve noted this before, but it bears repeating: USD/JPY tends to have the cleanest and most direct reaction to the monthly jobs report (and all US data), so it bears close monitoring for anyone trading US economic releases.
Looking at the chart below, USD/JPY has spent the last eight weeks consolidating between support at 109.00 and resistance up near 110.70. As many experienced traders know, volatility tends to be cyclical, meaning that periods of constrained market movement tend to be followed by periods of rapid, higher-volatility movements when price eventually breaks out.
It remains to be seen what direction the pair will ultimately break from its well-trodden range, but an NFP-driven bullish breakout this week, if seen, could open the door for a continuation toward 18-month highs near 111.70 in short order, whereas a bearish breakdown could quickly expose the April lows near 107.50 as we head into next month.
Source: StoneX, TradingView