On the morning of the first Friday of the month, the European equity markets become somewhat devoid of any real direction. Yes, it’s that time again, we’re all set for Non-farm Payrolls. Despite a strong indication from Mario Draghi yesterday that the ECB could even expand its QE programme beyond the €1.1 trillion that the market had already been led to believe, which pushed Eurozone equities strongly higher, traders are still reluctant to take any real view ahead of this afternoon’s Non-farm Payrolls report. I have a hunch that today’s payrolls will be fairly middle of the road, but I still see this as positive for equities and also near term dollar positive.
The state of the US jobs market is considered to be the most important data releases of this and almost every month. Markets need to know whether the US is hiring or firing as this has significant implications for the economy going forward. Increasingly also though, the market wants to know about the growth in hourly earnings. There are other components of the labor market i the US (such as the JOLTS job openings and also the quit rate is an increasingly important data point), however the Federal Reserve is looking for wage growth. Wage growth is seen as a measure of slack in the labor market and the FOMC will be reluctant to hike rates without an improvement in wage growth.
There has not been a notable improvement in wage growth in the past year. Wages have consistent with an average annual growth of around 2.0% for the past 12 months. For February, the expectation is for growth of 0.2% month on month which means that (with 0.3% growth from February 2014 dropping off the end) the annual growth would dips slightly from 2.1% in January to 2.0%. There is still no sign of any serious wage growth.
Now, that does not mean that REAL wages are not positive. The consistent decline in CPI inflation over the past few months has put the US into negative inflation territory (or deflation of 0.1%) whilst core inflation stayed steady at 1.6% last month. This means that real wages are still only growing a marginal amount of around half a percent. This is not really enough to justify a rate tightening… yet.
However, if the report is solid and in the region of say between 220,000 to 250,000 jobs along with an unemployment rate falling to 5.6% and the average hourly earnings of +0.2% for the month, talk after the release is likely to be around whether it will be enough to see the Fed changing the FOMC statement. Will the Fed remove the magic word “patient”?
I see a dollar positive move on this report if it is solid and the market could build itself into a frenzy of Fed tightening talk. However, I see this as a mistake. Unless we see the Payrolls report shooting the lights out I do not see this as being enough to result in a change of the Fed’s stance quite yet. We will obviously have to wait another two weeks before the next FOMC meeting to find out though.
Going into the report, the market is pricing in the chances of a rate hike at 54% by September, 73% by October and 83% by December. It will be interesting to see how this moves in the wake of the report.
So, another solid jobs report could be enough to drive expectation and a strong dollar for the next two weeks. However I see the Fed subsequently disappointing the dollar bulls by maintaining “patient” because I see the Fed is more dovish than the market thinks and therefore more cautious on rate hikes. We shall see.
Oh and for the record, my “guestimate” is 231,000 jobs for the headline number.