There’s been lots of coverage for the US NFP report coming up on Friday but it might not matter much for the market. All the data by definition is backward looking. On the other hand, the market is a forward looking machine.
This is something that all the best traders in the world will tell you: never focus on the present because it’s already in the price. Focus on the next 6-12 months because that’s where the market will head to.
The markets move on future expectations (doesn’t matter if they are right or wrong) and when we get events or data that change those underlying expectations, that’s when the market adjusts to new expectations.
When the Fed cut by 50 bps back in September, people focusing on the present sold the greenback and bought bonds. But that was a catalyst that changed future expectations. The market started to expect a pickup in economic activity and therefore less rate cuts than expected prior to the Fed decision.
Sure enough, bonds sold off and the greenback rallied as the data started to improve and rate cuts expectations got priced out. The data did matter of course, but it mattered not only because it reinforced underlying expectations but also because it was much stronger than expected, thereby leading to stronger and faster change in expectations.
We’ve got something similar in the first quarter of the year when expectations were sky-high for the economy but Trump’s trade war led to a change in those expectations. His policies made the market to expect a slowdown in growth. Again, people focusing on the present kept on buying the USD and selling bonds right when they actually reversed.
As a consequence of Trump’s trade war that led to fear and uncertainty, the data started to weaken and as it reinforced the growth fears, the momentum to the downside increased.
All of this is to say that the NFP report on Friday will reflect the present, that is, what has been caused by the recent fear and uncertainty. If we were to get a positive outcome on today’s tariffs announcement, then even if we get a bad NFP report on Friday, the market might just fade the negative reaction and keep on bidding risk assets expecting an improvement in the next months.
On the other hand, if we get worse than expected news, then a bad NFP will just exacerbate the negative expectations and increase the bearish momentum, while a good NFP will likely be faded expecting worse figures in the next months.
When trading the data, you should consider the underlying expectations, the context and if the data can change those expectations.