NFP Jobs Report Key to Fed's Decision Making

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Friday’s NFP jobs are in key focus this week

It is hard to overemphasize how important this NFP jobs print will be on Friday. The steady strong run of US data started around 5 weeks ago with the prior NFP print. The print was one of the biggest surprises in the last 20+ years as the jobs number rattled investors and persuaded Short Term Interest Markets that higher US rates were ahead.

For an explanation as to why the Fed sees high employment as inflationary see this post here. In summary, the Fed, as it follows Phillip’s Curve economic model, sees high employment as leading to higher inflation. So, a strong jobs print is seen as inflationary and vice versa. After the more hawkish expectations for US rates that we have been seeing over the last 5 weeks this NFP print on Friday will give an indication of how justified that view is.

What’s expected?

The headline is expected to come in at 200K, well below the previous reading of 517K. The average hourly earnings are expected to come in at 4.8% vs the previous of 4.4% and unemployment is expected to stay steady at 3.4%. Check out the expectations from the Financial Source calendar here:

So, the best tradable opportunity would come from a print that contradicts the last 5 weeks of hawking pricing. In short, a big miss in the data would be expected to be supportive of stocks, and precious metals, and weigh on the USD (so major USD pair upside).

If we see a headline payroll print below the market’s minimum expectations of 100K and average hourly earnings come in below or at market expectations alongside an as-expected unemployment rate of 3.4% then it is reasonable to expect S&P500 upside, USD downside, and gold upside.

Note the key trend line support that the S&P500 has around the 3950 regions.

This would be the best opportunity if we see a big miss on the NFP data. However, if the reading comes in high again (think headline above 325K) we could also see some more S&P500 downside, USD upside, and gold downside. However, STIR markets are now pricing in at a terminal rate of 5.65%, so there would be less conviction on a beat than a miss. Check out the STIR projections from Financial Source’s widget below.

Fed is data-dependent

This week saw Jerome Powell affirm what markets knew; namely that the recent strong US data indicates the Fed may well need to speed up the pace of rate hikes. However, Jerome Powell also stressed that incoming data between now and the March meeting on the 22nd will be crucial. This should make some strong reactions to the incoming US labor data this Friday as well as the Inflation print next Tuesday. Expect volatility in stocks, precious metals, and the USD ahead as incoming US data will heavily influence expectations surrounding US rates. The Bank of Canada kept rates unchanged this week and it, like the Fed, remains data-dependent for its rate path.

Other key events from the past week

USD: Semi-annual testimony, Mar 7-8: The Humphrey Hawkins testimony saw Powell stating the need for a higher US terminal rate than previously expected. The USD surged higher, but bond yields were muted in their response as much of the hawkish expectations were already priced into bond markets.

CAD: BoC holds rates steady, Mar 8: The Bank of Canada held rates at 4.5% as expected and expects to maintain rates at this level as long as economic conditions develop in line with the BoC’s expectations.

USD: US Labour Focus, Mar 10: The Fed is largely data-dependent now as it decides its peak rate, so Friday’s NFP print will be crucial for markets. If there is a big miss in the data watch out for a strong rally in US stocks, gold, and the EURUSD. It’s hard to underestimate the importance of this Friday’s NFP.

Key events for the coming week

USD: Inflation focus, Mar 14: The Fed is data dependent now, so hot inflation data next week will increase calls for a US terminal rate moving up towards 6%. Watch for USD, gold, silver & stock volatility next week.

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USD: US Retail Sales, Mar 15: Will US retail sales show more confidence from the US consumer? January’s print came in at 6.4%, but a weak print next week will show signs of a cooling US economy which should lead to a lower terminal rate. However, the US inflation data on Tuesday should be more influential.

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