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USD Risk Ahead! NFP Number Due Tomorrow…


NFP Preview: Another goldilocks report for the Fed… probably

Expectations: Markets forecast the US economy adding 160k jobs in January. The unemployment rate is seen remaining unchanged at 3.5%, while the participation rate is seen easing slightly to 63.1% from 63.2%. Average hourly earnings is seen rising at a clip of 0.3% M/M in January, up from December’s slightly underwhelming rate of 0.1% M/M.


Overview: It is likely to be another goldilocks jobs report for the Fed (goldilocks meaning data that is good enough to support positive risk sentiment, but not so good the Fed needs to start hiking rates to cool the economy). Anything above 100k jobs added per month is “solid” in the eyes of the Fed, but wage growth has eased in recent months, reducing the inflationary pressures that could have led to Fed rate hikes. Unemployment remains at record lows, although the participation rate remains well below historic highs; a source of continual economic growth for the US could be bringing these disenfranchised workers back (easier said than done).


Other recent jobs data: On Wednesday, ADP National Employment number blew the forecasts out of the park, coming in at 291k (estimates were for 156k). Moreover, weekly initial jobless claims data today fell to lows not seen since last May. Other indicators have been less promising. The ISM manufacturing employment component was consistent with employment in the sector declining by 15k. The ISM non-manufacturing employment component is still firmly in the territory that implies continued job growth, but eased in January. Finally, Challenger job cuts (the number of announced corporate layoffs) in January rose sharply to 67k, the highest since March 2019.


Manufacturing employment faces a hit: The market forecasts that the manufacturing sector will shed 5k jobs in January. ING remind us of the effects of the strike by General Motors in the second half of 2019; it contributed significant volatility to the NFP headline over the second half of the year. Though that issue has been put to bed, we now face the problem of a halt to Boeing production its 737 Max aircraft. ING comment that “with 600 suppliers impacted by the decision, we strongly suspect there will be a renewed drop in manufacturing employment”. Moreover, though much improved from December levels, ING add that the “January ISM manufacturing employment component remained in contraction territory at levels historically consistent with 15,000 of job losses”. Moreover, the January Beige Book published by the Federal Reserve reported “job cuts or reduced hiring among manufacturers, and there were scattered reports of job cuts in the transportation and energy sectors.” However, Construction job gains should offset this. After the Fed cut rates 3 times in 2019, the associated drop in mortgage rates has reignited interest in the housing market with the National Association of Home Builders sentiment index at 20-year highs. With housing starts and building permits on the rise and construction spending more broadly showing decent gains, this sector is likely to be a key driver of employment growth over the next six months, ING conclude.


Wage growth could go slightly higher: The Fed’s Beige Book continues to emphasise extreme worker shortages in some industries, which continues to beg the question; if workers are in such short supply, why are their wages not rising faster? Wage growth eased in the back end of 2019 to below 3% Y/Y from earlier highs of 3.4% Y/Y, despite solid employment gains. Most analysts look for a slight correction of the recent trend of weakening wage gains, with average hourly earnings forecast to rise to 3% from 2.9%.


Market reaction: As usual, the initial reaction is likely to be predominantly determined by the headline number, if it is better than forecast, expect USD strength. If worse than forecast, expect USD weakness. Thereafter, the extent of the reaction will be determined by the other components of the report, i.e. average hourly earnings, unemployment rate etc. The better these are collectively, the more USD bullish. The worse they are collectively, the more USD bearish.


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