02.09.202110:45 Forex Analysis & Reviews: Key US employment report will determine the fate of QE. Overview of USD, EUR, and GBP

There were two released reports before the US employment report on Friday, which significantly adjusted traders' expectations. It's a rare case when bad data improves sentiment, but that's exactly what happened on Wednesday, as both the ISM manufacturing report and the ADP's private sector employment report reduced the probability that the Fed could announce QE cutbacks as early as September.

The ADP report for July showed an increase of 375 thousand, which would have been quite good in pre-crisis times, but very little at the stage of labor market recovery, and besides, it is noticeably lower than the consensus of 625 thousand.

It is clear that the ADP report does not have such a deep correlation with Nonfarm data that final conclusions can be drawn based on it, but it cannot also be ignored. Bloomberg's current forecast is 725 thousand (or 750 thousand from other sources), and if the real result is approaching 400-500 thousand, it will mean that the Fed's condition for "further significant progress" in the labor market is not fulfilled, which means that the Fed will need more time to exit the QE program. In turn, this will support both stock markets and risky assets, that is, the market will be perceived with optimism.

The ISM production also turned out to be quite ambiguous. On the one hand, the growth of the index to 59.9. was surprising, since most regional issues showed a slight slowdown. Such an increase is supported by a rise in production and orders, as well as in inventories by 5.3%, which is a three-year high (this indicator is ambiguous, since it may indicate a slowdown in demand). The assumption that the recovery of US production has reached a peak is also supported by indicators such as the employment sub-index, which declined by 3.9 p to 49.9 p, below the level of expansion in 50p. and is the low for 9 months. In other words, the US manufacturing sector is completing the recruitment of new workers, which means that it is reducing the growth of new jobs, which is another negative signal for Friday's Nonfarm.

The latest data increases the probability that Nonfarm on Friday will not show an excess over the forecasts, and, perhaps, will be worse than the forecasts. These seemingly negative data inspire traders, as they give a chance for the continued growth of raw materials and risky assets.

It should be noted that the Fed has an additional argument in favor of the fact that there is no need to predict a rate increase for a relatively short period. The Fed's head, J. Powell, has argued for many months that the inflation growth is temporary, and it will begin a natural decline after the economy normalizes. The markets did not particularly believe him, which was reflected in the outstripping growth in the yield of inflation-protected TIPS bonds. As follows from the graph below, the business has practically agreed with the Fed. The bond yields are below the May highs, which means that the growth of consumer prices can really stop.

Overall, we can assume the development of events for the next two days. The probability that the employment report will turn out not better, but worse than expected, looks higher.

If about 400 thousand new jobs are created or lower, the market reaction will be expressed in a decline in the dollar index and the growth of commodity currencies such as AUD, NZD, and CAD. The lower the final figure, the higher the probability that the Fed will postpone the decision to November, December, or even to the first quarter of 2022. A surge in demand for risky assets is inevitable in this case.

But if the final data does not differ much from the forecasts, then the market reaction will be moderate or absent altogether.

The main risk is that data output is better than forecasts. According to the latest CFTC report, speculators have been aggressively building up their long dollar positions in the last reporting week, and large players always know something that the rest of the market does not know. If growth is shown close to a million, then we will face a collapse of the stock market, explosive growth in yields, and a sharp rise in demand for the US dollar and defensive assets.