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NFP Preview: Signs point to strong labor market ahead of US jobs report

The US jobs report for January is set to be released on Friday morning, just two days after the Federal Open Market Committee (FOMC) announced its decision to keep interest rates unchanged on Wednesday, as widely expected. In issuing its statement, the Fed once again noted that the labor market has continued to strengthen. Indeed, although the past several months of jobs reports have mostly fallen below consensus expectations, the data has still shown solid growth in US employment. January’s non-farm payrolls (NFP) could potentially show even better results, if other recently-released employment markers are to serve as any indication.

Because the closest FOMC meeting has just passed, the impact of Friday’s jobs report on financial markets is not likely to be as substantial as it would be if the Fed had an immediately upcoming rate decision. The next FOMC meeting is scheduled for mid-March. With that said, however, any substantial deviation from expectations in the jobs report could certainly help either boost or impede the Fed’s potential rate hike schedule this year. The more likely scenario on this particular Friday is that the jobs data exceeds forecasts, in which case the US dollar may finally receive some much-needed support after having fallen sharply since the beginning of the year. A better-than-expected NFP showing should likewise weigh on recently-rallying gold prices.

Markets are currently weighing the paths and interplay of both fiscal policy under the new Trump Administration along with monetary policy under the Fed. As usual, Friday’s jobs report will play a role in helping to determine the latter. In turn, the Fed’s future pace of monetary tightening and Trump’s economic policies going forward will continue to make a major impact across a broad array of financial markets.

President Trump has repeatedly stressed his strong focus on job retention and creation in the US. This promise follows on the heels of solid monthly employment increases throughout most of 2016, which highlight a healthy US employment landscape that helps support a more robust pace of interest rate increases by the Fed this year.

Last month’s data showing 156,000 jobs added for December fell short of expectations. As noted, however, while the past several months of non-farm payrolls data have also mostly disappointed forecasts, they have still shown a solid and stable US employment picture overall. After the Fed not only raised interest rates in December but also indicated that officials now expect three further rate hikes in 2017 instead of two, focus has turned to the pace of Fed tightening this year. Certainly, better-than-expected jobs data could help accelerate the process while worse data could very well impede it.

NFP Expectations

Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are currently around 170,000 jobs added for the month of January. The January unemployment rate is expected to come in at 4.7%, while average hourly earnings are expected to have increased by 0.3%.

Wednesday’s ADP private sector employment report, which can serve as a limited leading indicator for the NFP, came in much better than expected at 246,000 jobs added in January against prior forecasts of 165,000.

As for other key employment-related data releases for January: the ISM manufacturing PMI employment component expanded at a significantly faster pace in January than the previous month -  56.1 versus 52.8 in December. The ISM non-manufacturing (services) PMI will be released on Friday, shortly after the jobs report.

Finally, January’s weekly jobless claims data has generally been better than expected, with only one week in the month failing to beat expectations. The most recent release on Thursday covering the last full week of January showed a better-than-expected (lower) number of claims at 246,000 vs 251,000 expected.

Forecast and Potential Market Reaction

Overall, the trend of solid employment data is likely to have continued from previous months into January. The actual number is likely to skew even higher than expected, if the very positive ADP and manufacturing PMI employment data are to serve as any guide. With consensus expectations of around 170,000 jobs added in January, our target range is around 165,000-185,000. If the actual data falls above this range, the report should help increase expectations of a heightened pace of Fed rate hikes, thereby boosting the dollar from its current slump while potentially pressuring the recent gold rally. An outcome that is substantially lower than this range, however, could send the dollar even lower while lending even more fuel to rising gold prices.

NFP Jobs Created and Potential USD Reaction

> 200,000
Strongly Bullish

186,000-200,000
Moderately Bullish

165,000-185,000
Neutral

150,000-164,000
Moderately Bearish

< 150,000
Strongly Bearish

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