The first Friday of the month means only one thing for traders – the release of the blockbuster monthly US non-farm payrolls report. This has typically been the most important data point on the calendar as market watchers await with huge anticipation the headline number of jobs added (or lost), the unemployment rate and monthly wage growth numbers. With the Fed now putting more weight on the employment side of their dual mandate, the stakes are high for more rate cuts, or a reining in of the two 25bps moves officials forecast in their recent median dot plot.
So far, September has not lived up to its reputation as a big down month for stocks with the recent three-day correction a mere blip in the long-term bull channel. That series of higher highs and higher lows still appears strong with the index overbought on several indicators and in need of a healthy pause. Only a dip in the S&P 500 below 6,500 may dampen the bulls. Otherwise, we are looking at a run into the end of the year that typically delivers a return of more than 5% on average in the benchmark index, from October to December.
Volatility (VIX) remains below its long-term average and is low generally across stocks and bonds, with broader FX volatility the lowest since mid-2024. But traders have climbed a ‘wall of worry’ amid an environment of complacency amid high equity valuations, elevated geopolitical risks and increased uncertainty over the pace of Fed easing. Stronger data last week put some doubts in traders’ minds about how much policy easing we might see in the next few months.
The front-loading predicted by Fed officials will obviously be tested by the US jobs reports. Decent data will back up the recent dollar rebound and challenge the short-term downtrend line from the mid-May high on the Dollar Index (DXY). The squeeze, which we mentioned last week, could then continue to be a powerful driver for more upside. Seasonal patterns do typically reflect some stabilisation in the USD about now in the calendar year before a brief squeeze higher in late October/early November ahead of renewed losses for the DXY right into year-end. A weak NFP keeps the greenback in its long-term downtrend. We note that Fed Chair Powell reckons the “breakeven rate” of payrolls, that is hiring levels that would keep the unemployment rate stable, are roughly between zero and fifty thousand. Markets are broadly positioned for a soft report, with eyes on the JOLTs and ADP jobs data in the coming days likely to further direct traders.