Stocks Slip as Mixed Employment Data Fuels Economic Worries Ahead of Key Payroll Report | Daily Market Analysis

Key events:

• USA - Average Hourly Earnings (MoM) (Aug)
• USA - Nonfarm Payrolls (Aug)
• USA - Unemployment Rate (Aug)

The S&P 500 ended Thursday in the red, with optimism for stocks dampened by renewed concerns about the economy following mixed employment data, just ahead of the August nonfarm payrolls report. The Dow Jones Industrial Average slipped by 219 points, or 0.50%, while the S&P 500 dropped 0.3%. The tech-heavy Nasdaq Composite also fell by 0.3%.

The Japanese Yen extended its winning streak to a fourth consecutive session, supported by rising real wages in July, fueling speculation that the Bank of Japan might consider another interest rate hike before 2024 ends. Additionally, the USD/JPY pair faced resistance due to a weaker US Dollar, influenced by dovish remarks from Federal Reserve officials. On Thursday, BoJ Board Member Hajime Takata indicated that "if the economy and prices align with our forecast, we will adjust the policy rate in several stages." He also noted that while the domestic economy is recovering moderately, there are still areas of weakness. Despite recent volatility in stock and FX markets, Takata emphasized that the BoJ remains on track to meet its inflation target.

The Australian Dollar paused its two-day winning streak against the US Dollar as traders grew cautious ahead of the release of US nonfarm payrolls (NFP), which could provide further insights into the likelihood of a Federal Reserve rate cut this month. The Aussie Dollar found some support from better-than-expected Trade Balance data released on Thursday. Meanwhile, Reserve Bank of Australia Governor Michele Bullock, speaking at "The Anika Foundation" event in Sydney on "The Costs of High Inflation," stressed that it's too early to consider rate cuts. The board currently does not foresee the possibility of reducing rates in the near future.

Gold prices continue to trade within a narrow range, just below the weekly highs, as investors remain cautious ahead of the critical US NFP report due later in the North American session. The possibility of a more significant interest rate cut by the Federal Reserve in September has weighed on the US Dollar for three consecutive days, providing some support to the non-yielding yellow metal. This week's mixed employment data from the United States has raised concerns about the health of the labor market, adding to worries about the broader economy. Additionally, ongoing geopolitical tensions have dampened risk appetite, bolstering demand for safe-haven assets like gold. However, traders may want to wait for a clearer trend before committing to any further upward moves in the precious metal's price.

At the same time, the GBP/USD pair continues to trade positively for the third straight day, hovering around 1.3180 during Friday's Asian session. The ongoing weakness in the US Dollar supports the pair as market participants eagerly await the release of the US August NFP data later in the day. On the other hand, expectations of a modest interest rate cut by the Bank of England lend some strength to the British Pound. BoE Governor Andrew Bailey recently suggested that while long-term inflation pressures might be easing, it is too early to consider aggressive rate cuts. Market participants currently see a 25% chance of a rate cut at the BoE's September 12 meeting, with a higher probability of a reduction priced in for November.

The United States Bureau of Labor Statistics (BLS) is set to release the highly anticipated August NFP data on Friday at 12:30 GMT. This labor market data will be crucial in shaping market expectations regarding the size of the anticipated interest rate cut by the Federal Reserve in September, likely increasing USD volatility. The NFP report is expected to show that the US economy added 160,000 jobs in August, compared to the 114,000 jobs created in July. The Unemployment Rate is forecast to decrease to 4.2% from July’s 4.3%. Meanwhile, Average Hourly Earnings, a key indicator of wage inflation, are projected to rise by 3.7% year-over-year in August, up from the 3.6% growth in July.

The upcoming employment data will provide significant insights into the US labor market's strength, playing a critical role in shaping the Fed's interest rate decisions during its September 17-18 meeting and beyond. Fed Chairman Jerome Powell hinted during the Jackson Hole Symposium last month that further cooling in the labor market could prompt more aggressive policy measures, raising the possibility of a 50 basis point interest rate cut. Moreover, the Fed adjusted its July policy statement to acknowledge the risks to both sides of its dual mandate, moving beyond its earlier focus solely on inflation concerns.