NonFarm Payrolls to Make or Break Markets

The upcoming labour report carries significant weight, as it could either reinforce or ease concerns surrounding the US economic trajectory and may influence the Federal Reserve's stance on interest rate cuts.

The Clouds Are Gathering

Recent economic indicator releases have painted a gloomy picture of a slowing US economy, causing trader unease due to the uncertainties surrounding tariffs and extended stock market valuations. Earlier on Tuesday, US equities essentially erased all their gains since the November election in the wake of the imposition of tariffs on Mexico and Canada, as well as an increase in the tariff rate on China. However, some of those losses were recouped on Wednesday following reports that a potential easing of the tariffs might be possible soon.

Traders have focused on two consecutive drops in the Fed's GDPNow tracker that compiles the latest data to estimate the current quarter's GDP. It dropped to -1.5% and has subsequently moved to -2.8%, implying a potential quarterly negative growth for the first time since 2022. Some analysts point out, however, that this move is due more to technical reasons, such as an expanding trade deficit as businesses front-load orders from overseas ahead of tariffs. Also, there has been a move to import gold as traders have scrambled for safe havens, which is counted in the tracker but wouldn't affect the BLS' calculation of GDP, which will be published sometime in April.

Fraying or Soothing the Nerves

Even if traders are not convinced by media headlines of a potential "Trumpscession", the recent volatility in the stock market and the rising price of gold show that they are nervous. It wouldn't take much to push markets with high valuations back into a correction, especially if the upcoming jobs numbers suggest an underlying weakness in the US economy. That might bring forward expectations for a rate cut, which is still priced in for June. However, May has become increasingly likely. Fed Chair Jerome Powell said that there would have to be a change in the direction of inflation or the jobs market for the FOMC to change interest rates.

The consensus among analysts is for the report to show that 160K jobs were created in February, up from the 143K reported in January. However, it could be weighed down by cuts in government hiring and businesses holding off hiring due to uncertainty. The unemployment rate is expected to remain unchanged at 4%. On the one hand, those expectations imply a steady economy that could reassure investors. On the other hand, there is a wide range when it comes to expectations, with some predicting it could come in as low as 115K, citing a cooling economic environment.

Dow Pennant Signals Potential Breakout

Despite recent declines, the Dow Jones appears to be forming a pennant or triangle pattern, suggesting a potential measured-move projection towards 48,500 in the longer term if the 44000 and 45070 resistance levels give way to bullish price action. Conversely, a reversal below the regional support at 42350, followed by a break of 41700, could invalidate the pattern, transforming it into a bearish flag and signalling a double top formation. This would increase the chances of a potential bearish continuation towards 41400 and the 40000 handle.

Source: SpreadEx / Wall Street

Key Takeaways

The upcoming NFP holds the power to make or break market sentiment, influence rate cut expectations, and soothe or exacerbate economic jitters. While some economists and analysts alike expect a steady report that could reassure investors, others brace for a potential cooling environment.