Will Market Panic Leverage or Dampen the Dollar’s Reponse to NFPs?
Sometimes, the volatility of the NFPs release can sometimes overwhelm the fundamental meaning behind the data. At its roots, this indicator measures the net monthly change in employment. As a gauge for economic activity, an increase in jobs translates into an overall increase in net wealth and confidence that in turn leads to consumer spending. Considering domestic consumption accounts for approximately four-fifths of growth; this data is a catalyst for something much bigger. However, skepticism over the survey and its meaning for the economy has grown. Through the past two years, the US economy has shed over 8 million jobs. Not only does labor expansion need to absorb these out of work Americans; but there is a further influx of new graduates and immigrants that will press national payrolls even further. Therefore, modest monthly changes simply may not cut it for powering a true recovery. What’s more, the surprise factor of the positive reading has played out with March’s reading.
Perhaps a better assessment of the situation can be ascertained from the unemployment rate. Having held to 9.7 percent for three consecutive months now, this reading has not progressed much in its pull back from 26-year highs set not long ago. Considering the net increases needed each month to meaningfully alter this mass of jobless, the time frame for this sector contributing to a momentous phase of the recovery seems well beyond the horizon.
Furthermore, the consumer’s contribution to economic activity is a net of wage expansion and overall employment. While employers have stopped cutting jobs and are slowly rehiring; they continue to lower wages in order to cut costs. Through March, the annual pace of wage growth cooled to 1.8 percent – the slowest pace in recent history.
We can see the potential for the data itself, but perhaps the more important factor is the market itself. How will speculators welcome a greater-than-expected improvement? How would a disappointment be treated? Should risk trends already be on the move by the time the data crosses the wires, the report could accelerate an existing move (though its ability to thwart a strong rise or fall in sentiment is severely limited).
If, on the other hand, there is an effort to reverse Thursday’s aggressive sell off in everything risk-based; then a much better than expected increase in jobs and downtick in the jobless rate could feed already existing optimism. A retracement after such an incredible move is highly probable; but the follow through on such a shift would be severely limited; so it would not be a position that was meant to last for long.
In contrast, if the panic selling was a sign that investors are fundamentally frightened of the excessive risk they still have in their portfolios and the possibility that a scare could evolve into a full-blown panic (like the one that is so fresh in their minds from September/October of 2008), a delay in the recovery of the world’s largest economy could further the notion that consumer spending will not full growth domestically or abroad. It would essentially be one more step towards the industrialized world stalling in its tracks and the emerging market collapsing under its own weight.
What to Watch
As for what to watch during this event risk, there are plenty of pairs that could be prove responsive to the data. Aside from the obvious dollar connotations, there is the potential that all pairs based on low yield (like the Japanese yen) and high yield or risk (like the Australian, New Zealand and Canadian dollars) are at risk of volatility. At the same time, after the amazing volatility of Thursday, the likelihood of another day of comparable activity (that isn’t driven by a market-wide panic or demand for capital gains) is low.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.