NFP Shock: The Market Impact and What Comes Next
Breaking Down the NFP Data
The U.S. economy added 254K jobs in September 2024, a sharp increase from the revised 159K in August and significantly surpassing the forecast of 140K. This marks the strongest job growth in six months, well above the average monthly gain of 203K over the prior 12 months. Sectors leading the charge include food services and drinking places (+69K), health care (+45K), government jobs (+31K), and construction (+25K). Meanwhile, July and August’s figures were revised upward, adding an additional 72K jobs to the previous estimates, further cementing the strength of the U.S. labor market.
These revisions and the strong September data signal robust economic activity, suggesting that the labor market remains resilient despite a higher interest rate environment. However, the market response is not straightforward, especially when factoring in global uncertainties and changing rate expectations.
Immediate Market Reaction
The stronger-than-expected NFP data drove significant dollar strength, with traders quickly moving to short the euro-dollar pair near key technical levels. The 1.1000 mark, where $1.6 billion worth of options is set to roll off today, is the focal point for selling opportunities. Adding to this, the dollar’s bullish momentum is supported by a shift in short-term interest rate market pricing. Post-NFP, markets are now fully pricing in a 25bps Fed cut in the next meeting, with a small chance (around 9%) of the Fed holding rates steady.
This repricing is a stark change from the 60-40 odds for a 25bps versus a 50bps cut prior to the NFP release. The adjusted market expectations have caused the curve to steepen, reinforcing dollar strength and exerting pressure on other major currency pairs like the pound-dollar (GBP/USD) and Aussie-dollar (AUD/USD).
The Gold Conundrum: Why It's Not Reacting as Expected
Typically, a strong NFP print leading to a stronger dollar and rising yields would push gold lower. However, that wasn’t the case this time. Despite the robust job numbers and a surge in dollar strength, gold remained relatively stable. The answer lies in geopolitical risks. Concerns about potential Israeli retaliation against Iran have traders holding onto gold as a safe haven.
Dip-buying has emerged in gold due to the looming uncertainties in the Middle East, and traders are reluctant to short it, fearing that an escalation could trigger a sudden rush into safe-haven assets. This geopolitical backdrop is currently overriding the usual market dynamics, keeping gold supported despite headwinds from a stronger dollar. As long as the tension persists, gold may continue to defy traditional market reactions.
Strategy Recap and Key Risks:
- EUR/USD: Strong dollar supports selling euro-dollar around 1.1000. Watch for option expirations and daily pivot points near 1.0990 for additional opportunities.
- Gold: Despite signals for downside, avoid shorting gold due to geopolitical risks. Expect dip-buying as tensions between Israel and Iran continue to provide support.
Geopolitical Wildcards:
One of the main reasons markets remain jittery is the potential for Israeli retaliation against Iran. Any escalation would likely lead to sudden buying in safe-haven assets such as the dollar, Swiss franc, yen, gold, and spikes in oil prices. Market reactions would depend on whether the event is perceived as an escalation or merely a symbolic gesture.
Traders should be aware of two potential reactions: an immediate spike in safe-haven assets followed by market assessment. If the event is deemed worse than expected, the upside momentum in these assets could continue. If not, any initial spikes may fade quickly. As a result, trading in this environment requires quick decision-making and an understanding of how geopolitical events interact with market sentiment.
Conclusion
The 254K NFP print and the upward revisions to previous months signal a robust labor market, bolstering the dollar and reinforcing expectations for a 25bps Fed rate cut. This narrative supports dollar strength and presents shorting opportunities in pairs like EUR/USD and GBP/USD. However, the geopolitical landscape adds complexity, particularly for assets like gold, which are finding support despite otherwise bearish signals.
For now, the focus will remain on potential geopolitical developments and how they interplay with central bank policy paths. The market will be closely watching for any signals that could further shift interest rate expectations or escalate tensions in the Middle East, potentially altering the current trading environment.