The financial markets are in a state of heightened anticipation as the much-awaited US non-farm payroll report is set to release today. This key data set will be critical in assessing whether the US economy is veering towards a recession, following the jump in the unemployment rate in July. For Fed, the NFP data will play a significant role in determining the size of the upcoming rate cut as the start of its policy easing cycle, which is expected at the FOMC meeting later this month. However, market reactions could be complex and volatile, as shifting dynamics between stocks, bond yields, and currencies may generate counteracting movements.

Dollar saw broad weakness overnight, but the selloff was tempered by ISM services PMI report, which indicated that the services sector remains in modest growth territory. As of now, Dollar and British Pound are positioned in the middle of the week’s performance chart. On the other hand, Japanese Yen is staying as the strongest performer, supported by declining US and European benchmark yields. Yen also extended its rally during today’s Asian trading session. Close behind are Swiss Franc and Euro. Meanwhile, Australian Dollar sits at the bottom of the performance ladder, followed by New Zealand Dollar and Canadian Dollar, signaling a cautious and risk-averse market atmosphere.

Technically, USD/JPY would be eyeing 141.67 support if current decline continues. Break there will resume whole decline from 161.94. But an important zone around 140 lies ahead with 140.25 support, as well as 38.2% retracement of 102.58 to 161.94 at 139.26. So, downside potential might be relatively limited. Yet, decisive break of 140 would risk deeper acceleration in the selloff.

Fed’s Goolsbee signals multiple rate cuts as labor market weakens

In an interview with MarketWatch, Chicago Fed President Austan Goolsbee indicated that the current economic data justifies multiple interest rate cuts, with the process beginning soon.

Goolsbee pointed out that inflation is coming down “very significantly,” while the unemployment rate is “rising faster,” suggesting a cooling labor market.

He expressed concern that the persistent weakness in the job market could “turn into something worse” if the trend continues.

Given the balance of more favorable inflation data and deteriorating unemployment figures, Goolsbee suggested that the path forward is “not just rate cuts soon,” hinting at a sustained easing cycle by Fed.

Japan’s household spending rises only 0.1% in Jul, lagging expectations despite wage growth

Japan’s household spending edged up by 0.1% yoy in July, falling well short of the expected 1.2% yoy increase. While this marked the first annual rise in three months, the modest growth suggests that households are still holding back on spending due to inflationary pressures.

The increase was driven by a 17.3% yoy surge in housing outlays, with more people undertaking home renovations such as installing new kitchens and bathtubs, according to the Ministry of Internal Affairs and Communications. Entertainment spending also grew by 5.6% yoy, supported by purchases of televisions for the Paris Olympics. Expenditures on domestic and overseas package tours saw significant jumps of 47.0% yoy and 62.6% yoy, respectively.

Despite the tepid spending growth, the average monthly income of salaried households with at least two people rose by 5.5% yoy in real terms, marking the third consecutive monthly increase after 3.1% yoy and 3.0% yoy gains in June and May.

A ministry official noted that “spending has not increased as much as wages grew,” suggesting that some households might be saving part of their higher incomes. The ministry plans to continue monitoring how rising wages impact consumption going forward.

US NFP in focus as Fed’s rate cut decision hangs in the balance

Today’s US non-farm payroll report is crucial for all market participants, as it could determine the size of Fed’s expected rate cut this month. Currently, fed fund futures are pricing in 43/57% chance of a 25/50 bps reduction. Market reaction to NFP will also likely set the trading tone for the remainder of the quarter.

Economists expect job growth of 163k in August, with the unemployment rate forecasted to tick down from 4.3% to 4.2%. Average hourly earnings are projected to increase by 0.3% mom, indicating solid wage growth.

Recent economic data offers a mixed outlook. ISM Manufacturing Employment rose to 46.0 from 43.4, but the ISM Services Employment fell to 50.2 from 51.1. Meanwhile, ADP Employment report showed a disappointing 99k new jobs, down from July’s 111k. Initial unemployment claims averaged 230k over four weeks, down from last month’s 240k.

A key data point to watch will be the unemployment rate. Last month’s unexpected rise to 4.3% triggered the “Sahm Rule,” a reliable recession indicator. If the unemployment rate doesn’t fall as expected, or worse, increases further, it could signal deeper labor market troubles. This scenario might prompt Fed to take pre-emptive action with a 50 bps rate cut at the upcoming FOMC meeting. Yet, markets’ bearish reaction could overwhelm Fed cut optimism.

The stock markets’ reaction to NFP today is worth high attention. S&P 500 top at 5651.37, just ahead of 5669.67 historical high. On the downside, decisive break of 55 D EMA (now at 5475.02) will argue that rebound from 5119.26 has completed. Corrective pattern from 5669.67 should have then started the third leg. In this case, deeper fall would be seen to wards 5119.26 support again.

But of course, strong bounce from 55 D EMA would set the stage for breaking through 5669.67 to resume the long term up trend, sooner rather than later.

Elsewhere

Germany industrial production and trade balance, France industrial production and trade balance; Swiss foreign currency reserves, and Eurozone GDP revision will be released in European session. Later in the day, Canada will also publish job data, along with US NFP.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1048; (P) 1.1071; (R1) 1.1107; 

EUR/USD’s break of 1.1104 minor resistance suggests that pullback from 1.1200 has completed at 1.1025 already. Intraday bias is back on the upside for retesting 1.1200 first. Firm break there will resume larger rally and target 61.8% projection of 1.0776 to 1.1200 from 1.1025 at 1.1287. However, break of 1.1025 support will resume the fall from 1.1200 instead.

In the bigger picture, prior break of 1.1138 resistance indicates that corrective pattern from 1.1274 has completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Source: ACTIONFOREX

The Institute of Supply Management (ISM) has released its August services purchasing managers' index (PMI). The headline composite index is at 51.5, slightly better than the forecast. The latest reading moves the index back into expansion territory for 48th time in the past 50 months.

Here is an excerpt from the report summary:

Miller continues, "The increase in the Services PMI® in August is due to all directly factoring indexes (Business Activity, New Orders, Employment and Supplier Deliveries) with readings close to or above 50 percent. The Supplier Deliveries Index was in mild contraction (faster) territory in August. For a second straight month, the slow growth indicated by the Services PMI reading was reinforced by panelists' comments. Slow-to-moderate growth was cited across many industries, while ongoing high costs and interest-rate pressures were often mentioned as negatively impacting business performance and driving softness in sales and traffic. Although the Inventories Index increased by 3.1 percentage points into expansion territory in August, many respondents indicated their companies are still actively managing down their inventories."

Unlike its much older kin, the ISM manufacturing series, there is relatively little history for ISM's non-manufacturing data, especially for the headline composite Index, which dates from 2008. The chart below shows the non-manufacturing composite.

The more interesting and useful sub-component is the non-manufacturing business activity Index. The latest data point for August is 53.3, down from last month.

For a diffusion index, this can be an extremely volatile indicator, hence the addition of a six-month moving average to help us visualize the short-term trends.

Theoretically, this indicator should become more useful as the time frame of its coverage expands. Manufacturing may be a more sensitive barometer than non-manufacturing activity, but we are increasingly a services-oriented economy, which explains our intention to keep this series on the radar.

Here is a table showing the trend in the underlying components.

Source: SEEKINGALPHA

West Texas Intermediate (WTI) Oil price trades around $68.60 during the Asian hours on Friday, hovering around 68.37 lowest since December 2023, which was recorded on Thursday. Crude Oil prices depreciate due to concerns over demand in both the United States (US) and China.

The US ISM Manufacturing PMI indicated that factory activity contracted for the fifth consecutive month, with the pace of decline slightly exceeding expectations. Additionally, the world's biggest crude importer China showed that manufacturing activity fell to a six-month low in August, with factory gate prices dropping significantly.

On Thursday, the US Energy Information Administration (EIA) reported a Crude Oil Stocks Change, which reduced by 6.873 million barrels of crude Oil inventory for the week ending August 30. This was significantly larger than the market's expectation of a 0.9 million-barrel decrease, following the prior reduction of 0.846 million barrels.

The downside of the Oil prices would be restrained due to ongoing discussions between the Organization of the Petroleum Exporting Countries and its allies led by Russia (OPEC+), regarding a delay in planned output increases set to begin in October. According to Reuters, OPEC+ decided to postpone the scheduled Oil output increase for October and November and indicated that further delays or reversals of the hikes could be considered if necessary.

WTI prices may find support from the dovish comments made by Federal Reserve (Fed) officials, which enhance the chances of an aggressive rate cut by the Fed in September. Lower borrowing costs could stimulate economic activity in the United States, potentially boosting Oil demand.

Chicago Fed President Austan Goolsbee said on Friday that the longer-run trend of the labor market and inflation data justify the Fed easing interest-rate policy soon and then steadily over the next year. FXStreet’s FedTracker, which gauges the tone of Fed officials’ speeches on a dovish-to-hawkish scale from 0 to 10 using a custom AI model, rated Goolsbee’s words as neutral with a score of 3.8.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has risen to 41.0%, up from 30.0% a week ago.

Source: FXSTREET

BRICS is an important tool for reducing the dependence of countries on the dollar, Prime Minister Datuk Seri Anwar Ibrahim said in an interview with RIA Novosti and RT, reported Sputnik.

"The issue of using local currencies, which we have done in the past with China, with Indonesia, and to an extent with Thailand...we are [also] talking to India. We are still quite dependent on the dollar, but at least to reduce the impact, we need to do that. And BRICS is of course another vehicle to do that," Anwar said on the sidelines of the Eastern Economic Forum (EEF).

Established in 2009, BRICS initially comprised Brazil, Russia, India, and China. South Africa joined in 2010, and Iran, Egypt, Ethiopia, and the United Arab Emirates joined as new members in January this year.

BRICS, he added, is important for strengthening cooperation among the countries of the Global South and containing the onslaught of rich industrial states. 

"Well, we are very appreciative of the fact that [Russian] President [Vladimir] Putin officially invited me to attend the BRICS meeting in Kazan next month. 

“Our policy is of course to strengthen the Global South. BRICS is a very important vehicle to strengthen that sort of collaboration among countries in the Global South, not necessarily in antagonism, but at least to contain the onslaught of other richer industrialised countries and to be able to at least withstand the pressure and together build up the force." 

Anwar emphasised that the Global South must organise itself and become stronger to resist the pressure.

"We also have to then organise ourselves to be more strong, to be able to contain the pressures not within our control. So that is, to me, the wisdom." 

The EEF began on Tuesday and will run through Friday. It is being hosted by the Far Eastern Federal University in Russia's Pacific coast city of Vladivostok. Sputnik is the general information partner of the EEF 2024.

Source: Theedgemarkets

The GBP/JPY cross attracts fresh sellers during the Asian session on Friday and slides further below the 188.00 mark, hitting a three-and-half-week low in the last hour. 

This marks the third day of a negative move in the previous four and is sponsored by some follow-through buying surrounding the Japanese Yen (JPY), which continues to be underpinned by hawkish Bank of Japan (BOJ) expectations. In fact, BOJ Governor Kazuo Ueda reiterated earlier this week that the central bank will continue to raise interest rates if the economy and prices perform as expected. 

Adding to this, BoJ Board Member Hajime Takata said on Thursday that we must adjust monetary conditions by another gear if we can confirm that firms will continue to increase capital expenditure, wages, and prices. Furthermore, data released on Thursday showed that real wages in Japan unexpectedly rose for the second straight month in July, keeping the BOJ on track for another potential rate hike in 2024. 

Meanwhile, a mixed bag of employment data released from the United States (US) this week triggered worries about the health of the economy. This, along with persistent geopolitical tensions, tempers investors' appetite for riskier assets, which is seen as another factor underpinning the safe-haven JPY and exerting additional downward pressure on the GBP/JPY cross amid the lack of any buying around the British Pound (GBP).

With the latest leg down, spot prices confirm an intraday breakdown through the 189.00 horizontal support and a subsequent slide below the 188.00 mark favors bearish traders. Moreover, oscillators on the daily chart are holding in negative territory and are still away from being in the oversold zone. This suggests that the path of least resistance for the GBP/JPY cross is to the downside and supports prospects for further losses.

Source: FXSTREET