Crucial US Jobs Report Could Test Fed's Resolve, Bitcoin's Resilience

Another week, another shift in tone: Traders in traditional markets are once again betting that the U.S. Federal Reserve could soon pivot to a softer stance on monetary policy.

But a strong U.S. jobs report on Friday from the Labor Department could give policymakers a reason to not back off. Bitcoin (BTC), which often trades like a risky asset, similar to stocks, might remain under pressure If that were the case.

Futures traders on the Chicago Mercantile Exchange now expect the federal funds rate to peak at 4.5% next year; just a week ago the expectation was for the rate to go as high as 4.7%.

The change suggests that more traders are suddenly anticipating a more dovish approach by the Fed, which recently raised interest rates to the highest level since 2007 and continues to reiterate that it won’t cut rates next year. With inflation still elevated, the campaign is far from over, officials insist.

Federal Reserve Bank of San Francisco President Mary Daly said on Tuesday that there is “a lot” of room for policy makers to raise rates and that she is not worried about markets right now.

A key question is whether the Fed’s aggressive rate hikes could start to freeze lending and markets or pose risks to the stability of the traditional financial system.

“We always have the lender-of-last-resort responsibilities, and if market dislocation should come about, then we would be prepared to use that, but that's not what I'm seeing right now," she said.

This week’s Job Openings and Labor Turnover report, known as JOLTS, showed that the labor market is cooling – a positive sign that the Fed’s changes in monetary policy are starting to have an effect. However, the ADP National Employment report – capturing private payrolls – showed an uptick in hiring in September.

Employment situation

The numbers reported still suggest signs of a very tight labor market.

As Harvard Professor Jason Furman summarized in a tweet, “The labor market went from very, very tight to very tight.”

Friday’s Employment Situation report, scheduled for release at 8:30 a.m. ET by the Labor Department’s Bureau of Labor Statistics, will likely show a similar weakening in the job market, surveys show. According to FactSet, economists expect an increase of 250,000 jobs in September, in a slowdown from the 315,000 reported for the month prior.

“The employment number is the most important economic indicator,” said John Silvia, a former chief economist for Wells Fargo who founded Dynamic Economic Strategy.

Economic growth

The signals are mixed, though.

The Atlanta Federal Reserve's GDPNow forecasting model this week shows that gross domestic product probably increased by 2.7% in the third quarter, versus a prediction of 2.3% just a couple of days ago. This suggests that the economy is in good shape to sustain further pain caused by the Fed.

“The upswing in the Atlanta Fed GDPNow forecast suggests the economy is OK and that the Fed could still be aggressive,” Silvia said. This is in addition to “broader inflation numbers still suggesting that the Fed needs to tighten.”

As long as traders don't see a robust report on Friday combined with a strong rise in wages, bitcoin should continue to be stable, according to market analysts.

“Traders would not be surprised if we saw a downside miss,” said Edward Moya, senior market analyst at Oanda. “There has been a steady flow of hiring freeze announcements or layoffs across corporate America and the U.S. growth outlook was deteriorating in September, which should be reflected across several interest rate-hike sensitive sectors.”

“Bitcoin should maintain a healthy bid but still be confined to its respective trading range around the $20,000 level,” Moya said.