By Naeem Aslam
The most important day of the month is here: the US non-farm payrolls. This particular data set has the ability to not only dictate the trading tone for the day, but also set the momentum for the rest of the month.
Given the strong US ADP number, the bar is set high for Friday’s number to print a strong reading. And the question for traders and investors is whether a strong number is going to be perceived as good news for the market or if this will make traders fear further rate hikes by the Fed, which is in the process of taming inflation.
The Federal Reserve increased the interest rate by another 25 basis points recently, and many believe that the Fed has reached the pinnacle of its rate hike cycle.
However, there are some who believe that there is still a lot of firepower left, and there are chances that the Fed may increase rates further as inflation continues to print a number that is much bigger than their own inflation target.
For example, let’s say the Fed decides to raise interest rates again due to consistently high inflation. As a result, consumers become worried about borrowing costs, leading to reduced spending and investment in the housing market. Additionally, businesses may delay expansion plans or cut back on hiring due to higher borrowing costs, causing a slowdown in economic growth.
Looking at the dollar index and the fixed income market, one thing becomes clear, that traders believe that the fear of a recession taking place in the US is slim, which means that if the Fed wants to continue with their hawkish monetary policy, they certainly can. And a strong print on the US NFP data could easily further strengthen those odds for a rate hike and push equity traders over the edge.
Having said this, there is a strong possibility that a strong NFP number may become a reason for traders to buy the equity market, which faced some profit taking due to a dent in the US credit rating by Fitch.
Investors may see a strong NFP as a sign of a robust economy and renewed confidence in the market. This could encourage them to overlook the temporary setback caused by the credit rating downgrade and instead focus on the potential for future growth.
Additionally, a positive NFP report could alleviate concerns about the impact of the credit rating downgrade and provide a boost of optimism to equity traders, leading to increased buying activity in the market.
In addition, the earnings numbers from the two giants, Amazon and Apple, are also likely to help the overall sentiment.
Looking at Amazon’s number alone, one thing is crystal clear: any concerns about a deep recession taking place in the US are completely baseless. The economy is firing on all cylinders; otherwise, Amazon would not have been able to produce such a stellar number.
The revenue and EPS numbers released by Amazon left many traders with their jaws dropped Thursday night, and the stock was up with some solid gains. It is highly likely that with more positive NFP data, the Nasdaq index, along with the S&P 500, may recover some of their losses this week.
Gold prices
The precious metal traders are highly likely to be on the edge on Friday as traders will be watching the NFP data, which is going to bring weakness or strength to the dollar index.
So far this week, we have seen more steam come out of the gold prices despite the fact that we saw a downgrade in the US rating—an event that should have made the precious metal shine, as by nature it is considered a default hedge against uncertainty.
If the price closes in negative territory, then this will be the second week in a row for the precious metal to continue to trade downward. This downward trend in gold prices could be attributed to the market’s anticipation of positive NFP data, which would potentially strengthen the dollar index.
Investors might be shifting their focus towards the possibility of a stronger US economy, leading to a decrease in demand for safe-haven assets like gold. However, if the NFP data disappoints, it could reverse this trend and bring back some shine to the precious metal.
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
