It is Non-farm Payrolls day and it could be a crucial report as this is the final piece of key economic data that the Federal Reserve will have that can realistically sway the views on the committee over whether to raise interest rates or not in September. Going into the Non-farm Payrolls report, what can we expect and what will be the implications on the Fed?The flight into safe haven assets that we have seen this morning could be an indication of the concerns that the market has of a rate hike. Once again, many in the media seem to have convinced themselves that all it will need is another strong payrolls report and the FOMC is sure to move. However, after the market was convinced the Fed would move in June, only to be wrong then. Is the market setting itself up for another rate hike fake?
Non-farm Payrolls are expected to be 220,000 which is slightly higher than 215,000 jobs the US generated in July. Is this strong enough to push the Fed to act? Certainly not on its own in my opinion. The US created 280,000 jobs in May (subsequently revised down to 254,000) which helped to create the euphoria that was driving expectations of a June hike. That was not enough to push the Fed to act. Jobs growth has fallen for the past two months, with the consensus expectations slightly overshooting.
The headline data is unlikely to be enough, as the Fed would like to see wage pressure growing. The past few months have disappointed on the wage growth front. However if the month on month growth expectation of +0.2% is achieved then this would increase the year on year wage growth to 2.2% would be an improvement but still hardly outstanding.
All in all I think that it would need to be a headline number above 300,000 and average hourly earnings picking up considerably (say +0.4% for the month or even higher) to really make the doves on the committee sit up and pay attention.
The market reaction has been interesting to recent events. I feel that the issues surrounding China have certainly impacted the longer end of the Treasury yield curve (which reflects concerns over future growth), but the shorter end is where we find expectations of rate hikes play out. The two year yield has increased sharply from the spike low of late August. It is back to levels it hit in early June in the wake of that strong Payrolls report for May. This suggests that bond markets seem to be looking now for a rate hike. However, also the yield is also beginning to fall over and is back below 0.700%. Could this be a signal of wavering expectations?
I do not see what has changed though. The recent Employment Situation reports have been unspectacular, whilst the core Personal Consumption Expenditure has dropped to 1.2% after 6 months at 1.3%. Furthermore, the market has come under considerable pressure from the economic slowdown in China and the PBOC devaluation. The rhetoric out of the Fed has also been mixed. Whilst some FOMC members at the Jackson Hole economic symposium were hawkish and some were dovish, in the absence of Janet Yellen (read into that what you will, but all the key moves by the Fed have traditionally been guided by a speech by the Fed chair), Stanley Fischer was largely sitting on the fence in his speech.
So where does this leave us today? For me, another report, similar to the ones we have been having in recent months (headline between 200,000/240,000 and average hourly earnings growth of 0.2%) will not be enough to convince the Fed. It may create dollar strength in the initial reaction, but would see this as false expectation of a rate hike. The anticipation in the media for the FOMC in September 16/17 will be almost unbearable.