NFPs Can be the Dollar and Stock Spark But Financial Instability is the Fire


S&P 500, VIX, Dollar, USDJPY and NFPs Talking Points:

  • The Market Perspective: USDJPY Bearish Below 141.50; Gold Bearish Below 1,680
  • Top event risk through the close of this week is the September NFPs, left without a clear speculative view thanks to mixed labor day throughout the week
  • Under the focus on the economic docket, there are has been an increase in warnings from various authorities around financial stability…we should pay attention

S&P 500 and Markets Primed for Volatility on NFPs

We are heading into the final trading day of the week with any preconceived speculative bias broken by the recent market activity and one of the most recognizable economic indicators on tap threatening to stir volatility. At the beginning of this week, it seemed that a speculative bias had pulled the market back into one of its familiar cycles. The first 48 hours of trade for the month of October and the fourth quarter offered exaggerated support behind a bullish interest. Yet, that speculative cycle seems to have been fully broken over the subsequent two days of trade. Wednesday gave us a strong bearish gap on the S&P 500’s open, but the index clawed back much of the lost ground. The were was little pretense of fighting to get back to the surface this past session with a gap lower and slide from the same index leaving us -1.0 percent lower close to close. The retreat doesn’t simple cede control to the bears. Rather, the next stage of market movement seems to open to the collective winds of market condition, fundamentals and technicals.

Chart of S&P 500 with Volume, 5-Day ATR and 5-Day Historical Range (Daily)

Chart Created on Tradingview Platform

For fundamental event risk, we seem to have saved the best for last. Due for release in the US session Friday, before the official New York stock market open, is the September nonfarm payrolls. In reality, the data update from the BLS is fairly broad with important statistics from the jobless rate to the level of participation to average hourly earnings. That said, the most recognizable figure for the trading masses is the payrolls figure. The economists’ consensus for the jobs report this month is for a 250,000 net increase. That sets the baseline for the market response with a capacity to be surprised in either direction. Through this past week, we have absorbed data that would lead speculators to suspect a beat, miss and in-line from the most important data point. The employment component from the manufacturing PMI for September dropped sharply below the 50 mark and the JOLTs job opening figure tumbled 1.1 million positions for the same month. On the upside, we had the ISM services sector’s (which accounts for three-quarters of employment) labor component which held strong. And as for the ADP private payroll update, the 208,000 was essentially in-line with expectations. Expectations are likely split for the data, but the bigger fundamental picture probably still carries a bias.

Chart of Change in NFPs and ADP Private Payrolls with Differential (Monthly)

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Chart Created by John Kicklighter with Data from BLS and ADP

A Fed Warning and the Leverage That Sets Us On a Cliff

Whether the official US employment report meats, beats or misses expectations matters. However, the amplitude of the market’s response can be distorted by the markets underlying setting. There seems to be a concerted message coming out of the Federal Reserve of late that essentially reads as a warning that they will not be dissuaded from their principal inflation fight – even if the markets offer a tantrum. Thursday, Minneapolis Fed President Neel Kashkari repeated a frequented line from US central bankers that inflation was a primary focus but added that he expected some cracks to form in the financial market as the interest rate regime shifted higher. Is can be surprising to see one of the most dovish members of the US central bank say this, but the reinforcement was what really highlights the situation. Board Governor Christopher Waller made more explicit in commentary a short time later that the Fed would not be turned off of its tightening course even if the trouble started to arise for measures of financial stability.

Chart of S&P 500 Overlaid with Aggregate Central Banks’ Balance Sheet (Monthly)

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Chart Created by John Kicklighter with Data from St. Louis Fed FRED

It seems that the key players in the Federal Reserve are attempting to spell out for the market that they will not step in and stabilize the losses of speculators if they once again throw a tantrum. That may seem almost obvious from their given mandate, but the past decade has seen significant evidence to suggest that the central bank has been more than sensitive to the enthusiasm of the capital markets. I contend that unorthodox stimulus was pushed far beyond its economic benefit and has benefit market interests for years, but the authorities didn’t seem too perturbed with the leverage they were building. And, it was certainly leverage that they were encouraging. Not only were borrowed funds exceptionally cheap, but the pace of a benchmark like the S&P 500 meant that matching (much less beating) the market’s pace with a diversified portfolio was all but impossible. It required leverage on both notional and thematic terms. Now, that exposure presents a serious risk.

Chart of S&P 500 Overlaid with NYSE Brokerage Leverage (Monthly)

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Chart Created by John Kicklighter with Data from FINRA

USDJPY Remains My Preferred and Complicated Risk Measure and Other Top Events

When it comes to the response to the US NFPs, the S&P 500 and other standards for risk are perhaps more charged than the US Dollar. It isn’t that the Greenback won’t move, but so close to its multi-decade high, there isn’t as much an equilibrium of response. One pair that I find particularly interesting given the overlapping fundamental considerations remains USDJPY. This is every bit a carry trade consideration with the current yield spread a significant driver while the forecast is an even more critical accelerant. What makes this pair far more interesting are the artificial influences looking to offset the natural creep of rate differentials, growth potential and preference for systemic safe havens. All of that seems to support USDJPY lift to some degree, but there is a clear struggle around the 145 level. That overhead seems to be the product of an artificial influence in the form of the Japanese Ministry of Finance that intervened in this area last month to prevent further depreciation of the Yen. Will they move again if the fundamentals pressure this key level? Have they been active without announcing their actions? We may soon find out.

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Chart of USDJPY with 20-Day SMA and 6-Day Historical Range (Daily)

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Chart Created on Tradingview Platform

While the US employment report is a top listing that can tap into systemic concerns, it isn’t the only source of event based volatility ahead. Expected for release as the same time as the NFPs is the Canadian employment report for September. Unless we see the rare alignment of US and Canadian employment statistics (one good, one bad), it would likely leave USDCAD with more volatility than clarity. As such, pairs like CADJPY, GBPCAD and AUDCAD are more appealing. Another measure of economic insight is the UK’s OBR report on the initial economic and fiscal assessment of the governments proposed mini-budget. Remember the volatility that followed the initial announcement. I will also be watching the FX reserve updates from China, Switzerland, Hong Kong, Russia and Japan today. The Dollar’s sharp appreciation is causing problems globally, and the ability to fend off the pressure has its limits. Bloomberg reported this past session that FX reserves have dropped $1 trillion so far this year, the biggest drop on record.

Critical Macro Event Risk on Global Economic Calendar for the Next 24 Hours

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Calendar Created by John Kicklighter





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