S&P 500: What Will the US Department of Labor's Monthly Report Point to?

 
 
 
 
 
 
 

The focus of investors' attention today is the publication (at 12:30 GMT) of the monthly report of the US Department of Labor, as it can significantly affect the subsequent decisions of the Fed regarding the program of economic stimulus. Economists forecast that 500,000 new jobs outside the US agricultural sector were created in September, unemployment fell 0.1% to 5.1%, and average hourly wages rose another 0.4%. These are very positive values, and they should support the dollar, provided that they coincide with the forecast or turn out to be better than it.

Earlier, Fed Chairman Jerome Powell has repeatedly stated that the main reference point for the central bank when deciding on monetary policy is the full recovery of the labor market and its return to pre-crisis levels, when the American economy created an average of 150-250 thousand new jobs every month and unemployment was between 4% and 5%.

Yesterday's data on the number of jobless claims in general can also be called positive. As expected, they showed that the number of jobless claims fell last week. The number of initial applications for unemployment benefits fell to 326,000. Despite the fact that this is 1.5 times higher than the average pre-coronavirus values, the data turned out to be better than the forecast of 348,000 and the previous values of 364,000, 351,000, 335,000, which indicates an ongoing the improvement in the state of the American labor market (from late May to late July, the number of initial jobless claims fluctuated between 368,000 and 424,000. This is above the pre-crisis level, albeit below the highs reached at the beginning of the pandemic. In 2019, when the Covid-19 pandemic is still not started, the average number of weekly initial applications filed was 218,000).

The ADP report on employment in the private sector, released Wednesday, indicated that 568 thousand jobs were created in the private sector of the US economy in September. The forecast assumed an increase of 428 thousand after an increase of 340 thousand in August. The dollar has strengthened sharply after the release of the ADP report, as it strengthened the likelihood of an earlier start of the Fed's stimulus policy rollback.

The strong ADP report on private sector employment encouraged market participants betting on further strengthening of the dollar. This report does not directly correlate with the report from the US Department of Labor, but is often viewed by its predecessor.

If today's official data from the US Department of Labor with data for September turns out to be disappointing, it will again postpone the start of curtailing the Fed's stimulus programs indefinitely. In this case, the dollar may decline sharply. The worse the labor market data is expected to be today, the more the dollar will decline. But in any case, a sharp increase in volatility during the period of publication of these data is guaranteed. Probably the most cautious investors will choose to stay out of the market during this time frame.

Key US stocks indices have fluctuated strongly in recent days amid concerns about the possibility of a new slowdown in the recovery due to rising cases of new coronavirus infections, as well as fears about the Chinese economy. As you know, the largest developer China Evergrande Group remains on the verge of bankruptcy, and another large Chinese developer Fantasia Group Holdings announced that it could not repay some of its dollar-denominated bonds. Trading in Fantasia shares was suspended Wednesday.

At the same time, the recent rise in US government bond yields put pressure on the tech sector, causing the Nasdaq Composite to lose more than 2% last Monday. Strong selling of shares in some of the largest tech companies led to a general decline in equity markets earlier in the week.

Key US stock index futures have been correcting in the previous 3 days after falling earlier in the week. Thus, futures for the S&P 500 broad market index, which fell to a local minimum of 4280.0 at the beginning of the week and grew in the last 3 trading days, are at 4395.0 at the time of publication of this article, still remaining under pressure. Investors, just in case, remain cautious ahead of the publication of monthly data on the US labor market.

The demand for the US dollar remains both against the background of investors' expectations about the tightening of the Fed's monetary policy, and against the background of continuing concerns about new strains of coronavirus, which could lead to another round of economic downturn.

As of this writing, DXY futures are traded near 94.21, at yesterday's close level. Despite the decline from the local multi-month high of 94.52, reached last week, the positive dynamics of the DXY dollar index remains.

According to forecasts, if the situation on the labor market continues to improve, then the Fed may announce a reduction in the bond buyback program at its next meeting, which is scheduled for November 3. Reduced dollar liquidity in the market will lead to a new increase in demand for the US dollar, and investors have already begun to put the possibility of tightening the Fed's monetary policy in prices.