Discussion of the FOMC Balance Sheet Will Leverage NFPs Impact
- The March US labor statistics will leverage its risk and monetary policy influence more than usual
- Note by the FOMC minutes that a plan for stimulus withdrawal may soon be discussed revives policy speculation
- A slew of other key event risk - most prominently the US-China leadership meet - will conversely throttle activity
It's that time of the month again. The US labor statistics for March are due Friday, and recent developments are likely to leverage their fundamental importance and subsequent impact on the market. The NFPs (nonfarm payrolls) - and accompanying employment data - from the US have historically held the market's attention through evolving economic, business and financial cycles. Recently, however, its influence has waned as the data established a deep groove of steady improvement and the Fed's effort at transparency seemed to set a clear track for monetary policy. Where the general track of the jobs data hasn't changed, the environment has. And, with this change comes the risk of volatility.
Whether monetary policy is tightening or easing, the direct link between the jobs statistics and central bank action has always been clear. This year and last, the steady increase in net jobs and slide in the jobless rate have justified the course the Fed had plotted. Where the market used to discount the group's forecasts as being too optimistic, they now overshoot the official projection claiming the Fed is being too conservative. Yet, despite the Fed's actual accelerating pace and the market's anticipation of more speed; the lift to the Dollar has all but disappeared. The hawkish lean for the US was priced in and its most dovish counterparts (ECB and BoJ) have started their slow change in course. To add fresh vigor to rate speculation, an untested facet of normalization has been pushed: reining in the unorthodox stimulus. The FOMC minutes Wednesday noted that the discussion of working down the balance sheet could start before the end of the year, and with that the market sees the scope for further Dollar movement - not to mention risk adjustment.
Risk trends remain an unspoken threat that lingers just over the horizon. Skepticism is now as common place as an existing 'long risk' bias. While a strong jobs figure can further the probability of stimulus withdrawal and the subsequent impact on speculative exposure, the risk may prove more immediate for a disappointing turn for labor data. If the steady improvement in the US economy implied by jobs growth were to falter, it could give a tangible foothold to speculative fears. Further adding to the complication, we have a host of event risk on the docket besides the NFPs - much of which can effectively tap sentiment or global trade relation themes. This can translate into high volatility with an overbearing sense of uncertainty that cuts trends short. Short-term swings are preferable to dubious weekend trend developments. Pairs like EUR/USD, GBP/USD and AUD/USD can offer measured bullish or bearish moves for the Dollar. USD/JPY on the other hand is a specialized opportunity for a weak outcome from the data. We discuss the importance, focus points and strategy for this event risk in today's Strategy Video.
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