Today’s US non-farm payrolls report will be the last one before the Federal Reserve’s next policy meeting on November 3, when the central bank is expected to reveal the timing and pace of reduction of its vast asset purchases programme.
We reckon it would take a colossal miss to change the Fed’s tapering plans. Even if it misses the mark by a good few-hundred-thousand, we don’t think it would raise much doubt over the Fed’s plans to reduce its bond buying programme. The monthly report is expected to show more than 500,000 jobs were added in September.
The headline jobs report will probably meet or beat the expected number given the fact we have seen mostly better-than-expected NFP indicators over the last couple of weeks. The ADP private sector payrolls report, for example, beat expectations quite easily on Wednesday with a print of 568k compared to 425k expected. Jobless claims fell more than expected and the employment component of the ISM manufacturing PMI also topped expectations. So, most indications suggest we will get a good enough jobs number, one that will please the Fed before it gently applies the brakes on QE.
Stocks not out of the woods yet
Paradoxically, a strong US jobs report might not be welcomed on Wall Street as it will most likely underpin bond yields, which, in turn, might reduce the appeal of growth stocks in the technology sector which carry low dividend yields. So, there is the potential that the kick-back rally we have seen since Monday’s plunge might come to a halt ahead of the weekend.
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The market surged on Thursday, ironically on America’s ability to go deeper into debt as the can was kicked further down the road. Senate leaders agreed to lift the debt ceiling in a deal that pulled the US from the brink of default. But the government will be able to meet its obligations only through December 3, which means the debt clouds hanging over the markets have not been completely lifted. This is something that may come back to haunt investors at some point in the not-too-distant future.
Energy prices remain in focus
Meanwhile, there was a sense of relief felt across the financial markets after surging natural gas prices reversed on Wednesday, causing crude oil to turn lower too, before both markets rebounded sharply off their low to close slightly higher.
Wednesday’s drop in energy prices helped to reduce concerns over high levels of inflation slightly, which is partly why we saw global markets sigh relief. The rally in gas prices was halted as Russia said it would help tackle Europe’s energy crisis. But that’s only if Germany’s regulator grants its controversial Nord Stream 2 undersea gas pipeline a speedy clearance it badly needs.
Though there is growing pressure on German and European leaders to get their acts together amid surging energy prices, it remains to be seen whether they will grant Russia what it is seeking. We expect the volatility in energy prices to remain elevated, which, in turn, should keep stocks in wide ranges.
Crude oil prices have remained supported on the dips after the OPEC+ refused to hike output more than 400K per barrel a day that it had agreed to previously. In the US, the Department of Energy said it has no plans to tap its oil reserves to help stabilise prices. China used this tactic, but it had no major impact on prices.