Forex: The granddaddy of macro inputs returns – It's NFP time again

Asian markets are mainly in the red with a few pockets of green as investors anxiously await critical economic data and policy signals ahead of Friday's crucial U.S. jobs report. This will be the last significant indicator of labour-market health before the Federal Reserve's September meeting and could heavily influence the pace of rate cuts.

On Thursday, the ADP employment report showed that only 99,000 jobs were added in August—well short of the 140,000 forecast by economists. This came hot on the heels of Wednesday's disappointing job openings data, painting a picture of a weakening economy with lower inflation. The odds of a Fed rate cut are all but locked in, but the real question is whether the Fed will consider going full-blown dove with a 50-basis-point cut to provide an extra lifeline to the economy.

Friday’s NFP report will likely underscore cooling labour market conditions. The JOLTS survey earlier this week revealed job openings in July dropped to their lowest level since January 2021, with layoffs rising. Sure, the labour market is softening, but it’s at a pace that could get the Fed seriously pondering a 50-bp cut. The slow creep in unemployment isn’t something you can brush aside. Ignoring a small leak on a sinking ship never ends well—it’s only a matter of time before it turns into a flood.

When the labour market starts slipping, it doesn’t just lose its footing; it tends to spiral into a full-blown avalanche. That’s been the hallmark of U.S. recessions—when the jobs market stumbles, it doesn’t just trip; it takes a nosedive and happens fast and with little warning. The Fed might be forced to act quickly or risk being caught behind the curve as the economy heads south.

When The granddaddy of all macro data drops, and the FX market’s heartbeat starts racing, strangely, the consensus for this all-important NFP is sitting at a "reasonable" 165k, with the unemployment rate expected to drop to 4.2%. If that lands, we could see yields pop and the USD rally, as both FX and Bonds seem to be quietly pricing in a spooky number.

We’re heading into this jobs report with US 2-year and 10-year yields just under 3.75%, and the market’s pegged the chances of a 50bps rate cut at a cool 40%. A 25bps cut is practically baked into the cake, but with USDJPY hanging around 143.50, it feels like FX traders are still a little jittery about what’s coming down the pipe.

Still, with so much rate-cut optimism already priced in, a near-consensus print could pare those wild rate-cut expectations back and give the dollar a much-needed boost. Usually, a consensus outcome should leave market levels broadly unchanged, but the crowd seems to be eyeing a headline number closer to 125k or lower.

Oh, and don’t forget—global yields are practically glued to US rates ahead of the payroll data, once again proving how influential this macro heavyweight can be.

Speaking of which, this week’s job opening data( JOLTS) was critical. The details hint a higher chance that we’re moving away from a soft landing, especially under Fed Governor Waller’s Beveridge curve framework.

The job vacancy rate slid further to 4.6%, quit rates stayed low around 2%, and layoff rates held at 1%, which implies an unemployment rate closer to 4.5%. According to Waller’s framework, 4.3% is the tipping point where unemployment starts rising faster, so keep an eye on how these numbers shape the post-NFP narrative. Waller’s speech after the payrolls report could be the cherry on top—if he goes full dove, the market will know exactly where we’re headed next. Buckle up

The trade set-up

It's no secret that markets tend to give the ADP report a collective shrug regarding US payroll expectations—after all, the correlation between ADP and NFP is notoriously shaky. But yesterday’s ADP print of 99k, the weakest since the post-lockdown reopening in 2021, raised some eyebrows. Small businesses shed staff like it’s going out of style, while medium and large firms only tiptoed into hiring, barely making a ripple.

Meanwhile, the ISM Services report came in as expected, holding steady at 51.5. But the real eye-opener was the employment sub-index, which took a sharper-than-anticipated drop to 50.2, adding a dash of concern to the mix. Still, it wasn’t all doom and gloom for the jobs market. In a surprising twist, continuing jobless claims shrank from 1860k to 1838k for the week ending August 24th, offering a glimmer of hope in an otherwise bleak employment landscape.

In short, the job picture is looking increasingly patchy, but we’ll need tomorrow’s NFP to tie it all together. Will it be a sign of resilience or more evidence that the labour market is cooling off?

The soft dollar performance over the last few sessions, without its usual snap-back, suggests that negative job market data has struck a chord in the FX space. It feels like markets are bracing for something less than stellar in today's payroll report, even if the consensus is pegged at 165k. The real intrigue is whether traders are already positioned for an even lower figure.

But here’s the fundamental question of the day: What numbers would force the Fed’s hand into a 50bp cut in September? A weak headline might do it, but with so much rate-cut anticipation already baked in, it’ll likely take more than just a miss—it’ll need to be a real shocker to move the dial. Today could be when markets get the clarity they crave or another round of “wait-and-see” from the Fed.

(The Three Scenarios That ING Bank Published)

1. Payrolls below 100k, unemployment up to 4.4% (consensus is 4.2%): 50bp September cut becomes the base case, and the dollar dives

2. Payrolls were softer than consensus but above 100k, and unemployment remained unchanged at 4.3% or up to 4.4%. Markets will be left guessing the size of the September cut. The dollar prints weaker on the release but may bounce back shortly if unemployment hasn’t ticked higher.

3. Payrolls are at or above consensus, unemployment declines: 25bp cut in September. There is room for hawkish repricing in the USD OIS curve, which currently prices in 175bp of cuts over the next five meetings. There is ample room for a USD rebound.