Nonfarm payrolls to test the dollar’s winning streak

A fragile sense of calm has returned to global markets ahead of the latest round of US employment data. After reaching their highest levels since the financial crisis this week, US Treasury yields have stabilized somewhat, waiting for nonfarm payrolls as the catalyst that will either revitalize this rally or extend the latest pullback.

Forecasts point to another solid employment report. Nonfarm payrolls are projected at 170k in September, slightly lower than last month but still a healthy number overall. Meanwhile, the unemployment rate is set to tick down to 3.7%, while wage growth is expected to have picked up some steam in monthly terms.

As for any surprises, early labor market indicators have been encouraging for the most part. Applications for unemployment benefits fell during the month, which suggests there were no signs of any mass worker layoffs. Similarly, the employment sub-indices in the ISM surveys were consistent with continued employment growth. The main downside risk comes from the disappointing ADP report, although its track record as a predictor of nonfarm payrolls is poor.

Therefore, it appears that the US labor market continues to fire on most cylinders and if that’s confirmed by the official employment readings today, it could light another fire under US yields and by extension help the dollar to resume its uptrend.

Dollar stands tall

In the bigger picture, the dollar is headed for its 12th consecutive week of advances. Behind this impressive rally lies a blend of solid economic fundamentals and increased debt issuance that have pushed US yields to their highest levels in a generation, allowing the dollar to reestablish itself as the king of FX markets.

The dim prospects for other currencies have also played a huge role. The euro has been plagued by economic growth concerns, the British pound is grappling with a weakening labor market and softer risk appetite, the Japanese yen has been devastated by interest rate differentials, while commodity-linked currencies are haunted by China risks.

These factors are unlikely to reverse in the foreseeable future. Leading indicators suggest the US economy remains fairly resilient, shielded by tremendous government spending and the slower transmission of high interest rates thanks to fixed-rate mortgages. Meanwhile, debt issuance will remain ample this quarter, keeping upward pressure on yields.

By contrast, there isn’t much to suggest the slowdown in Europe and China is approaching its conclusion. Hence, it seems like the dollar rally has scope to stretch further.

Gold licks its wounds, oil retreats further

Another dreadful week for gold prices is coming to a close. While bullion managed to stabilize somewhat yesterday after falling to hit its 200-week moving average, it is still headed for heavy weekly losses, crumbling under the weight of soaring real yields and the mighty US dollar. Strong US employment readings today would likely reinforce the downside pressure on gold, although a disappointing report could spark a relief bounce.

Oil prices tanked for the second straight session yesterday and WTI is headed for weekly losses of around 9%, which is a huge move even for the volatile energy market. Reports that Russia would lift a self-imposed ban on pipeline diesel exports may have contributed to the selloff, although the main driver seems to be a reassessment of the demand outlook amid concerns around global growth.

Crude oil is now trading at the same levels it was in late August, so it has been a case of ‘easy come, easy go’ for prices. With demand conditions softening and US oil production ramping up, it won’t be easy for oil prices to bounce back quickly, unless OPEC+ rolls out even greater supply cuts.