Markets stabilise as payrolls in focus

There are two major deadlines for financial markets right now, the Brexit trade deal negotiation between the UK and the EU, which potentially needs to be concluded by mid-October, the second is the US Presidential election on the 3rd November. The markets are sensitive to both issues right now, and we expect heightened levels of volatility as we move through October; however, for now markets remain calm, although this could be the calm before the storm. 

Don’t bank on more US fiscal stimulus this year 

The first issue we will look at is the US Presidential election. While we won’t post our US election special on here for a couple of weeks, the election should still be front and centre on traders’ minds as they trade US stocks or the dollar. For example, stocks have had a decent recovery over the last few days, and this is down to hopes that talks between the Democratic leader of the House and the Republican US Treasury Secretary will come to an agreement about a fresh round of economic stimulus. While more economic stimulus from the US government could be a powerful driver of stocks, the US election may scupper any chances of this happening before January, at the earliest. Even if a deal is reached between both sides, the money is extremely unlikely to become available until after the election. During the Presidential debate on Tuesday night, President Trump said that if he didn’t win then he would contest the result, so financial markets cannot be sure of a peaceful transference of power from the Republicans to the Democrats if President Trump loses the election in a month’s time. Thus, while progress on stimulus talks is all well and good, if this is the only thing underpinning this week’s rally in US stocks then the gains could dwindle as the realisation that the election is a major hurdle to the fiscal stimulus becoming a reality starts to dawn on investors. 

What to expect from September’s payrolls report 

This week’s US payrolls report, released on Friday 2nd October, may tell us if there is more to the rally in US stocks than just the discussions in Washington about a potential fiscal stimulus package. However, this report will no doubt be viewed through a political lens as it’s the final payrolls report before next month’s election. The economy is one of the key influences on voting intentions, so a strong Payrolls report could be good news for the Trump campaign, while a weaker reading could boost the Democrats and Joe Biden. 

The market is looking for a reading of 850k, down from the 1.37mn jobs created in August. The key leading indicators for the payrolls report, including the employment component of the ISM manufacturing survey, the private sector ADP payrolls report and the 4-week moving average for initial US unemployment claims, have all improved in the last month, but not by enough to boost expectations of NFPs in a meaningful way. Our simple method for predicting payrolls is looking for a more modest 700k increase in jobs last month. While the headline figure itself is important, it is worth also looking out for the unemployment rate and average hourly wages. The unemployment rate is expected to fall to 8.2% from 8.4%, while average hourly earnings are expected to remain relatively flat at 4.8% YoY. From a political standpoint, this is not what you want if you are running as an incumbent, and the weak labour market is a key reason why President Trump continues to lag behind Biden in the polls. The latest data from the BBC’s poll of polls has Biden on 51% and Trump on 43%. 

Watch payrolls, then watch the polls 

However, we live in strange times, the polls cannot always be trusted, and neither can the economic data estimates. If there is a major shock with September’s NFP report, then we could see the polls move sharply and this may impact the stock market. In the short-term, it doesn’t appear that the prospect of a Democrat in the White House is spooking financial markets, possibly because it makes another round of fiscal stimulus more likely. From a market perspective, a surprisingly strong payrolls report could weigh on EUR/USD, which is testing resistance at $1.1750. This pair could see a sharp sell off on the back of a strong NFP on Friday. The recent low at $1.1625 is key support in the coming days, however, we would like to add a caveat to this analysis since we believe any dollar strength could be short lived. USD/JPY is also worth watching whenever US payrolls are released. USD/JPY is in a deep downtrend, unless we see a reversal above 106.10, the most recent peak from mid-September, then it is hard to see how the dollar can recover vs. the JPY at this stage. Overall, the dollar index is still weak, last week’s attempt at a recovery has stalled and the dollar has sold off as US stocks have staged a recovery. It is hard to see this trend reversing in a profound way in the near term. 

Politics and the pound 

Politics is also driving GBP. The EU is taking legal action against the UK government over its decision to draw up plans to ditch some parts of the Brexit divorce deal, which initially hurt the pound. However, this was highly anticipated, hence why an initial sharp drop in GBP/USD was soon reversed, although a move back towards $1.30 has been rebuffed.  It is hard to see how any trader can get too enthused about the pound right now as the EU/UK trade deal deadline looms. However, for those people who think that there could be some value to the pound, then they may be heartened by comments from the Irish government that a trade deal with the UK is likely by the end of this year. Overall, we believe that there will be a trade deal, and when this is confirmed the pound is likely to surge on a broad basis.