NonFarm Payrolls of Paramount Importance

The first week of May was of chaotic nature for financial markets. Stock markets were under fragmented pressure as U.S. Tech sector was sold-off with Nasdaq losing more than 3% in four days, and investors switching to cyclical companies’ shares with new highs for the latter. Dow Jones index is peaking up 0.7% this week.

Rational explanations for such capital flows are not many as somebody is referring to commodities prices hike as a major driver for shares of cyclical companies, somebody blames U.S-China increasing tensions. However, all these excuses are seen flimsy. Recent data for economic activity in the United States are pointing in the other direction as business activity in service sector is increasing. In the production sector where cyclical companies are represented, in the opposite, business activity is dropping.

Fundamental background became less favorable after Fed’s member Robert Kaplan made strange hawkish statements supported by Treasury Secretary Janet Yellen. Though it could be just investors’ fears and wishful thinking. But, why shares prices of many U.S. companies that reported outstanding first quarter results are not growing? Instead shares’ prices are falling. Hedge funds reported maximum share sales off since 2008 in the last three weeks. And all this just on the edge of record economic growth.

So, maybe hedge funds are not sharing positive forecasts of economic growth, or the know something about some kind of a force majeure and are selling shares before it arrives. Looking at gold prices and sharp decline in Treasuries yields, this scenario may be not far from the reality.

Although, positive forecasts could also be misleading, in line with an economic “Theory of mistakes” that says that huge stimulus measures along with money printing could lead to higher inflation that is treated by economic entities as economic growth, leading to overheated expectations for a short period. So companies may hire excessive workforce waiting for rising demand, consumers may spend more waiting for wages to rise.

So, we may have a combination of factors including some possible economic decline that scares hedge funds. In this regard, we should closely monitor S&P 500 index performance. If it slips below 4100 points and holds below this landmark a possibility of 15-25% correction to a support level at 3350 points would rise significantly.

U.S. labor market data that is due to be published today is of paramount importance. Our statistical modeling confirms that NonFarm Payrolls could be presented close to 978,000 new jobs. The unemployment level may be worth than expected at 5.9-6.0%. Nevertheless, it is a positive data that may pressure the Fed towards tighter monetary policy. So, better economic data could be worse for the market as it may trigger stocks sell-off.

Crude market had no major news this week except crude reserves in the United States that contracted by 7.9 million barrels. That pushed Brent crude prices to $70.10 per barrel with rolling back to almost $68 per barrel.

Gold prices jumped to $1818 an ounce on Thursday with a possible target at $1850 per troy ounce after ten-year Treasuries yield slipped below 1.57%.

The Greenback is feeling uncertain ahead if the NonFarm Payrolls data release. The EURUSD is heading towards 1.22900. The GBPUSD is hoovering around 1.39000 after Bank of England left monetary policy unchanged on its meeting on Thursday. The pair is likely to remain within the current trading range before NonFarm Payrolls would be announced. It the pair rises to 1.39700 it would be interesting opportunity to open sell positions. In the alternative scenario the Pound may descend to 1.38100 against the Greenback.

The USDJPY will be also waiting for Non-Farm Payrolls data close to 109.00 level, and may move to 109,70, a good sell position, or tumble to 108.40.