Non farm payroll preview

Whilst the NFP was set up to be the biggest event of the week, it is safe to say the Fed stole its thunder. The Fed’s dramatic U-turn on Wednesday could now overshadow often most highly anticipated data release of the month.

The dollar dived lower on Wednesday and US indices charged higher, breathing a sigh of relief at the Fed’s more dovish stance. Today the dollar remained steady and Wall Street opened moderately higher as the market continues digesting the Fed’s move, or lack thereof.

Attention will now fall to tomorrow’s non-farm payroll. The expectation is for 166k new jobs to have been created in January. A solid number, although significantly lower than December’s 312k. The ADP payrolls smashed expectations of 185k in January, with 213k private jobs created.  Given the strong correlation between the ADP report and the NFP, we could expect to see a surprise to the upside on Friday.

Will the market care?
A strong US labour market is nothing new. The Fed has been giving an upbeat assessment of the labour market for many months. Job creation across 2018 was the strongest in three years with a 12-month moving average of just shy of 220k in December. Even as the Fed signalled a pause in interest rate rises on Wednesday, this was done with an acknowledgement of “strong labour market conditions”. Instead external factors such as US – China trade dispute, concerns over slowing global growth and Brexit were cited as the cause for caution at the central bank.

The Fed putting hikes on hold, despite a strong labour market, leaves traders assuming that even if we see a strong beat in the NFP data tomorrow, the Fed is not about to change its more dovish position quickly. With this in mind a strong NFP figure could only have a limited impact on the dollar.

Whilst the Fed did draw attention to weakening inflationary pressures, a stronger than expected average earnings figure could provoke a slightly more meaning rally in the dollar, but only marginally so.

Disappointment could hit the market harder
On the other hand, disappointing NFP data, whilst not expected given the strong ADP reading, could have a larger market impact. A miss on the headline figure could add to growing market concerns over the outlook for the US economy as global growth concerns continue to haunt investors. It would reduce the possibility of a rate rise further and pull the dollar lower. 

A miss on average earnings would reinforce the Fed’s message, pulling the dollar potentially even lower.
Gold has rallied over 2.2% across the past week, surging on Wednesday on the Fed’s U-turn and extending gains today. Weakness in the NFP report could see Gold take another step higher targeting $1350 before $1400.