Risk appetite firms up as investors anticipate softer US data

Risk appetite improves, equities climb

Following a turbulent start to September, risk appetite improved yesterday, with US equity indices catching a good bid and the S&P 500 index testing its recent all-time high. Similarly, cryptocurrencies are also edging higher, with bitcoin reclaiming the $111k level.

Meanwhile, the dollar is tentatively surrendering the gains recorded at the start of the week, with euro/dollar trading north of 1.1670 at the time of writing, and dollar/yen edging lower as the 200-day simple moving average is actively capping the upside.

That said, a good chunk of investors are cautious despite the improved risk appetite. Gold is keeping most of this week’s gains and is now hovering around the $3,550 level, with the recent bullish trend potentially supported by the weakening dollar, and expectations for a looser Fed monetary policy stance ahead. Notably, Miran’s confirmation hearing to replace Kugler at the FOMC yesterday shed light on Trump’s criteria in selecting new Fed members.

All eyes are on the nonfarm payrolls report

Following the mixed ISM Manufacturing PMI survey, the noticeably weaker ADP report printing at 54k, the rising jobless claims, the ballooning Challenger job cuts, and the upside surprise at the ISM Services PMI, the focus shifts to today’s labour market data.

With the early August nonfarm payrolls (NFP) report and its downward revisions proving a turning point in the current Fed strategy, today’s NFP is expected to show a 75k jump in August. Unemployment is forecast to edge higher to 4.3%, but still below its long-term average, while average earnings are seen rising at a decelerating 3.7% pace.

Taking into account yesterday’s reaction to the stronger ISM Services PMI survey and the overall newsflow, it is evident that investors are positioned for a softer jobs report today. Part of these downbeat expectations is based on the weaker ADP report, but it is worth noting that the private payrolls report has a relatively poor record of predicting the first print of the NFP report.

That said, downbeat expectations raise the prospects of an acute risk-off reaction if the NFP climbs above 100k, and/or the August figure is revised sharply higher, with equities potentially suffering the most and the dollar most likely catching a decent bid. However, even in this unlikely scenario, the Fed rate cut on September 17 appears safe, despite key Fed members such as New York Fed President Williams keeping their cards closer to their chest at this stage.

Fed rate cut appears to be a done deal

Most members agree on the need to act, but behind closed doors they are afraid that this move might be seen as the product of political pressure from Trump, and as a sign that they might be genuinely worried about the US economic outlook. The latter could potentially be the main reason they avoid cutting rates by 50bps in two weeks’ time, even if the data justify such a reaction.

Notably, while there are no scheduled Fed appearances today, there is a strong chance that certain Fed members will want to have the final say ahead of the usual blackout period commencing on Saturday, September 6, particularly, if today’s data support the case for a stronger cut on September 17.

Trump puts tariffs back in the spotlight 

The US President is keeping trade at the forefront, announcing that he would be placing “fairly substantial” chip tariffs “very shortly”. Meanwhile, there are reports that Trump is preparing to renegotiate the United States-Mexico-Canada Agreement, one of the main acts of his first tenure at the White House, which came into force on July 1, 2020. At least, there is finally clarity on the recent US-Japan trade agreement, with a 15% tariff imposed on almost all Japanese imports.