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NFP – Scenarios, Trades, Overview – FXWW Chatroom
300k and Above – A June rate hike looms larger and the Fed gains the confidence
needed to remove the “patient” forward guidance from its March statement. A break of
1.10 in EUR/USD could be the start of another down-leg. Short EUR/USD
250k to 300K – Our house forecast lies in this range. This looks strong enough to keep
hope for a June rate hike alive, especially as market-based measures of inflation
expectations have rebounded off the lows. JPY weakness seen over the past 6 years in
March is a strong seasonal trend and we expect that will motivate renewed interest in
USD/JPY upside on data outperformance. Long USD/JPY
200k to 250k – The consensus lies in this range, still fairly consistent with a strong labour
market. Revisions to prior months and average hourly earnings growth may set the tone
for FX markets. Only small FX moves expected
150k to 200k – With the market already priced for the first rate hike out of September
2015, a disappointment of this magnitude, while notable given the strong trend of gains
seen over the past year, may not be enough to push expectations credibly further out, at
least not without some “confirmation” from the FOMC that their stance on the labour
market may shift. Nevertheless, USD weakness likely to take hold initially. The relative
hawkishness of the BoE may leave it as an attractive pull-back candidate. Long
150k or Below – Winter weather related issues aside, a very poor result could result in a
pricing out of any expectations of a June FOMC rate hike but also add some doubt into
the FOMC’s desire to remove its current “patient” guidance. A slowdown the US, a global
growth leader, has broader global growth implications for export-focused economies and
commodity producers. Short AUD/JPY
Friday’s employment report will shape expectations for Fed action at the upcoming March meeting and beyond. In her semi-annual monetary policy before Congress, Yellen noted that sustained labor market improvement would lead to increased confidence in inflation moving towards its longer-term target, a pre-requisite for tightening. Thus, another healthy job gain — particularly if accompanied by another relatively firm gain in average hourly earnings – would go a long way toward solidifying expectations for “patient” being removed from the March statement and increasing the perceived odds of a rate hike in June.
After an incredibly strong Q4 (on average, payrolls grew by 324,000 per month), payrolls posted a solid increase of 257,000 in January and we look for the job gain in February to have been similar at around 260,000 (+255,000 in the private sector). In our view, there is little to suggest any meaningful change in underlying employment conditions. While weather may present downside risk, for the most part, the extremely harsh conditions that have plagued much of the nation of late did not set in until after the February survey reference week (the week ended Saturday, February 14). In fact, during the payroll survey week, the average temperature across the nation was above normal (temps in the West, Northwest, and Southwest were far above normal), and precipitation was below normal.
By sector, we look for most of the February job gains to have been in line with those registered in January, with the exception of retail and financial activities (where the employment advances may have cooled following outsized increases in January) and professional business services (where hiring may have stepped up somewhat after a below-trend performance in January).
Just as important as the headline job gain will be the change in average hourly earnings. December’s outright decline of 0.2% was more than offset by a rebound of 0.5% in January, lifting the year/year rate from 1.9% to 2.2% (back near the top end of the range that has existed since August 2009).
In February, we look for hourly earnings to have posted a trend gain of 0.2% (the average monthly advance in 2014 was +0.18%), though the year/year rate may have slipped to 2.1%. With respect to the Fed’s decision to hike rates, it is not clear to what extent wages must actually rise in order to justify a move. To be sure, more tangible evidence that wages are firming
would make the Fed’s decision to act far easier. However, while expressing concern over the low inflation rate, Yellen (in her recent Congressional testimony) suggested that strong job gains combined with further declines in the unemployment rate might be sufficient to give policymakers reasonable confidence that wages (and ultimately inflation) will indeed be heading higher.
Recent wages increases announced by Wal-Mart and other retailers must also bolster the Fed’s confidence on this front, even if the impact on the average hourly earnings figure itself will likely be difficult to discern. The fact that these companies have acknowledged that they need to raise wages in order to attract and retain workers suggest that labor market is now tight enough to be putting upward pressure on wages.
Finally, after an uptick in January from 5.6% to 5.7%, we look for the unemployment rate to have returned to 5.6% in February. Despite January’s increase in the jobless rate, the household survey actually signaled positive underlying developments. For example, after adjusting for the effect of new population controls, the labor force surged in January by 703,000, while household employment climbed by 435,000. In February, growth in the labor force may have cooled (following January’s outsized advance) relative to the advance in employment, contributing to a downtick in the jobless rate in the month.