NFP Preview Wage growth remains key focal point

As usual, the latest monthly US jobs data will be reported on the first Friday of the month by the US Department of Labor. The data is poised to take on increased importance for market participants after the February figures (as reported in early March) saw a smaller than expected rise in average hourly earnings which overshadowed an otherwise healthy jobs report as the headline employment increased by a solid 313 thousand then. That being said, in the month before, wages had increased more sharply than expected and in December the gain was in line with the expectations. So, earnings haven’t been too bad. Wages are likely to rise further over the coming months as workers demand higher pay as employment continues to improve and CPI inflation rises further.

As well as watching the reaction of the dollar, it will be interesting to observe if interest rate hike concerns will come back to haunt the stock markets. The stronger wages data for the month of January, reported in early February, had helped to spark a wave of heightened equity market volatility as investor worried over rising inflation and interest rates. Will there be a similar reaction if we see stronger-than-expected wage growth? Equity markets have had a very volatile start to 2018 already, so we wouldn’t be surprised if the data were to lead to further wild price swings in the major stock averages. But how about the dollar and bonds? Well, if the data is strong enough to lead to higher bond yields then surely the dollar will follow suit. However, if the numbers turn out to be surprisingly weak - especially average hourly earnings - then don’t be surprised to find both yields and the dollar at lower levels.

Current NFP Expectations

Analysts are actually quite optimistic that average hourly earnings rose solidly last month – by a good 0.3% month-over-month, no less. They are not too confident about the prospects of another blow out jobs figure, however. After last month’s 313,000 print, this time analysts are expecting to see a more modest 190,000 increase in non-farm employment. If correct, this will still be considered a decent number overall, unless earnings disappoint expectations again. The unemployment rate is seen falling further to 4.0% from the current 4.1%.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a mixed picture overall. The ADP private sector employment report came out better than expected, continuing the recent trend. It revealed a solid 241,000 private jobs added in March against a prior forecast of around 208,000. It should be kept in mind, however, that the ADP report is typically not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.

Among other pre-NFP indicators, the ISM manufacturing PMI employment component showed job growth at 57.3 in March, down 2.4 points from 59.7 recorded in February. However, the employment component of the dominant services sector PMI (i.e. the ISM non-manufacturing PMI) showed faster job growth at 56.6 compared to 55.0 in February, up 1.6 points.  

Meanwhile, the weekly jobless claims data for the month of March have mostly been in line with the expectations, and have remained near historic lows. However, this has been overshadowed by a significant rise in the number of job cuts, as reported by Challenger, Gray & Christmas, Inc. The Challenger Job Cuts were 39.4% y/y in March vs. -4.3% in February.

Forecast and Potential USD Reaction

With consensus expectations of around 190,000 jobs added in March and given the mixed-bag pre-NFP data inputs, we would be very surprised if we witnesses another blow out number like that 313,000 reading in February. We expect the headline figure to be in the range between 180,000 to 210,000. Though the US dollar will likely be moved by a host of other fundamental factors, including speculation on a potential global trade war, any headline jobs outcome falling above this range should give the US dollar at least a short-term boost. Anything within the range will unlikely make much of a significant impact. And any reading that falls significantly below this range is likely to encourage fresh selling of the greenback. Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures again disappoints expectations, then the dollar could see a more substantial drop. Conversely a higher wage figure should boost the greenback on higher inflation and interest rate expectations.