How could different financial assets react to looming NFP data?

The US Bureau of Labour Statistics is set to release November’s jobs report on Friday, December 8, with expectations for a 180,000 rise in Nonfarm Payrolls. Gold is expected to react stronger to a disappointing jobs report than an upbeat one.

US stocks are trading modestly higher on Thursday, led by outperformance in tech stocks (GOOGL is up over 5%), as investors position ahead of Friday’s payrolls report and on the back of a series of benign employment data.

However, in the more recent period, the S&P 500’s upward movements have coincided with a notable outperformance of cyclical stocks compared to defensive ones, especially in response to the decline in interest rates.

Still, several policy and economic questions need to be answered before investors are willing to signal the all aboard. One pressing question revolves around how market participants will react to slowing growth and a softer US labour market.

Will market players welcome these developments due to the implications for inflation (cooling down) and the potential for easier monetary policy? Alternatively, will the negative news be interpreted as confirmation of various recession warnings?

Fed rate cuts have resurfaced, causing investors to become more vulnerable to robust economic data or a Fed pushback. This situation does not necessitate a shift to a cautious view or short positions, but rather highlights the need for caution and potential market vulnerabilities.

Comments by Fed’s Waller have revived the idea of “adjustment” cuts, where the Fed considers lowering the funds rate due to declining inflation. This notion has influenced market pricing for the 2024 funds rate outlook, with 130 basis points of cuts now factored in.

The data remains a significant risk, particularly if upcoming releases challenge the current market narrative. The FOMC dots next week could fuel speculation about early easing, primarily if Chair Powell provides less forceful pushback. The market’s pricing of more aggressive easing profiles introduces a balance of risks around the meeting.

The potential impact of robust growth data leading to increased rate pricing would differ from earlier periods this year. Equities might have more room to respond positively to robust data and higher rates, as the belief that the Fed will adopt a dovish stance if growth disappoints provides a “Fed put”.

Oil prices reached a 5-month low due to investors’ cautious stance ahead of the US employment report, which is expected to show modest job growth in November.

The report is expected to show a pullback in new hiring amid a significant economic slowdown. China’s overnight trade data showed a decline in crude inflows, with oil imports dropping to 10.33 million barrels per day.

OPEC estimated China’s oil demand to increase to 16.29 million barrels per day during October-December, but this forecast is uncertain due to China’s manufacturing challenges and Beijing’s economic slowdown.