Markets await NFP data amid Middle East uncertainty

Geopolitical anxiety resurfaces

The US dollar rebounded against all its major peers yesterday, driven by anxiety surrounding whether the US and Iran will indeed manage to agree on a deal that allows them to hold more comprehensive talks.

Sentiment took a hit yesterday after the Wall Street Journal reported that Iran is very unlikely to accept the US’s proposal for reopening the Strait of Hormuz, while US and Iranian forces exchanged fire around the strait.

Oil prices rebounded but pulled back again today following headlines that the US was considering resuming operations to help ships and vessels through the strait. That said, with the ground towards a permanent peace deal remaining very shaky, investors became concerned about inflation again, evident by the higher Treasury yields and the increasing probability of a Fed rate hike next year. According to Fed funds futures, there is a 40% chance of a 25bps hike by April 2027.

Nonfarm payrolls take center stage

Today, the spotlight is likely to turn to the US nonfarm payrolls report for April. Following the strong rebound to 178k in March, expectations are now for a slowdown to 68k. However, the 109k gain in the private sector, according to the ADP, may be shifting the risks slightly to the upside. The unemployment rate is seen remaining steady at 4.3%, while average hourly earnings are forecast to have accelerated to 3.8% y/y from 3.5%.

A better-than-expected NFP print accompanied by accelerating wages may add to concerns that inflation could spiral out of control if the war in the Middle East is not resolved. The probability of a Fed rate hike next year could go higher, thereby allowing the US dollar to gain some more ground.

Japan wage data support BoJ hike case

In Japan, central bank data indicated that the nation may have spent as much as $32.06bn in efforts to support the battered currency during the Golden week holidays, suggesting repeated episodes of intervention, corroborating remarks by top currency diplomat, Atsumi Mimura, who said yesterday that they are not restricted on acting.

What’s more, wage data today revealed another month of strong salary increases, highlighting solid growth after spring wage negotiations resulted in hikes of above 5% for a third straight year. This kept the probability of a rate hike at the next BoJ gathering strong at 65%.

Wall Street stands tall, gold remains above key support

On Wall Street, all three of the main indices closed Thursday’s session slightly lower, as investors started questioning whether the US and Iran can indeed reach common ground. A strong NFP gain and accelerating wage growth later today could result in some further retreat amid increasing speculation of a Fed rate hike.

However, with S&P 500 companies on track for their strongest profit growth in more than four years, the outlook remains overly positive, evident by gains in the futures market today.

Gold extended its gains but pulled back after briefly emerging above the 50-day exponential moving average. However, the metal remained above the key zone of $4,640 and today is on the rise again. Gold traders will also lock their gaze on the NFP report later today.