NFP day: Oil's dark shadow looms and Payrolls always throw curveballs

Oil prices skyrocketed, while stock markets stumbled as investors scrambled for cover amid the brewing chaos in the Middle East. Brent crude has taken off, with traders bracing for a potential weekend explosion—literally and figuratively. The chatter? Israel could be gearing up for a strike on Iran's oil and nuclear infrastructure, a move that would send seismic ripples through the markets. The risk? Massive. Investors are on edge, and hedges are flying fast as everyone prepares for what could be a volatile week ahead.

On the brighter side, the U.S. economy continues to showcase its resilience, especially in the services sector, shaking off global turmoil and domestic political uncertainty. The ISM services index surged to 54.9—its highest level since February—so we’re definitely not flirting with recession yet. This week’s ADP report also exceeded expectations, with stronger-than-anticipated private-sector hiring in September. While there was a slight uptick in weekly jobless claims, it barely made a dent, and the four-week moving average actually dipped, reinforcing the labour market’s strength. With the economy performing this well, the Fed may not have a strong case for a jumbo rate cut in November—some are even questioning if cuts are needed at all. But the real wildcard? Friday’s Non-Farm Payroll (NFP) report. That’s the one that could flip the script entirely.

The buzz? The whisper number on the NFP is pointing lower, and a lot of nervous energy is swirling around in the market.

That said, recent data—job openings climbing and the ADP report showing 143k jobs added in September—hints that we might see a decent payroll figure, maybe even north of 150k. But if there's one thing Payrolls Day is known for, it's throwing curveballs. No one can predict precisely how the dice will land. The baseline expectation is 150k jobs and a 4.2% unemployment rate, but any major surprise could set the tone for the markets through the rest of the year. And that’s what makes this report so influential.

But if there's one thing Payrolls Day is known for, it's throwing curveballs. No one can predict precisely how the dice will land.

Meanwhile, looking ahead to October, things could get messier. We’ve got dockworker strikes, Boeing labour disruptions, and the aftermath of Hurricane Helene—all of which could drag the following payroll report into negative territory. That’s a story for next month. It’s all about September, and traders are on the edge of their seats.

Now, the dollar trade? It’s been a bit of a bumpy ride. We’ve been tactically bearish on the greenback and U.S. rates for a while, but recent geopolitical tensions have flipped the short-term script. With oil prices skyrocketing, what was once a tailwind for risk-on trades is now a full-blown headwind. Capitulation in the buck might be on the horizon, but it feels like that’s more of a next-month story, especially if some sort of ceasefire emerges in the Middle East. For now, oil’s dark shadow is looming large over FX and global markets, and the mood is tense.

Brent crude soared more than 5% on Thursday, notching its biggest single-day rise in over a year. If oil holds steady through Friday, it’s on track for its most significant weekly rise since January last year. While it’s true that oil’s surge is from a relatively low base, the impact is real. Global investors are sweating, and if the geopolitical tension keeps bubbling, the inflation outlook could get a nasty wake-up call.

Indeed, yields are rising, with the U.S. Treasury yield curve steepening, signalling that inflation jitters are creeping back into the market.

And over in Asia? The sugar high from China’s stimulus last week is fading, overshadowed by oil’s relentless rise and the spread of risk aversion. As for China’s mind-blowing market rally—Hong Kong-listed stocks soared 34% over 13 straight days—the future now lies in Beijing’s hands. If the government pulls out a CNY4-5 trillion fiscal bazooka, we will likely see the rally continue. But if not, buckle up—it could get choppy.