Job Weakness is the straw that will break the Fed’s Mid-Cycle Adjustment Back

The record long expansion in the US is finally showing major signs of weakness. The labor market has been the bright spot of the US economy, but we could see a harsher deterioration with the jobs report as several indicators are pointing to a sustained slowdown. Job growth has drastically slowed from the ~200k pace that we were getting used to over the past several years and we could see this jobs number come in much softer than expected.

– US jobs to rise by 145,000
– US wages to gain 0.3%
– US Unemployment to remain steady at 3.7%

The trade war has crippled business confidence and the uncertainty with future investments will likely see hiring forecasts remain soft for the foreseeable future. The GM strike is worth noting but will likely have a greater impact with the October reading as the strikes took place too late in the month.

The Fed will closely watch this employment report as pronounced weakness will cement the fears that the downside risks have exacerbated. Up until now, the Fed has maintained the stance they are in the middle of a mid-cycle adjustment, refraining from committing to an easing cycle. The greater the odds are for a recession to occur, the more likely will see the Fed commit to an easing cycle and begin contemplating a new QE program. Going into the release, markets appear firmly convinced the Fed will deliver one 25 bps cut in October and another in December.

Will USD/JPY retest the summer lows?
The dollar displayed broad weakness following this week’s disappointing economic data. With growing recession worries, we could see the dollar significantly underperform against the Japanese yen. The economy is losing momentum and if we see a huge miss with the nonfarm payroll headline number, we could see 106.00 immediately tested with 105.34 providing major support. The summer low of 104.50 remains the line in the sand of where things can get real ugly. If we see a slight beat or job growth over 150,000, dollar yen could get pop higher but sellers could emerge around the 107.70 region.

Gold
Weakness in the US labor market could mean gold’s pullback is over. The yellow metal could rally as market nervousness grows as it seems the global economic slowdown has spread to the US. It took two contraction readings from the manufacturing region and a significant drop in the service sector for markets to believe the Fed will now need to commit to an easing cycle and consider a new QE program. Gold could be supported on a wave of global stimulus and lingering risks that are stemming from both the US-China trade war and the transatlantic one.

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