Employment indicators strength raises further questions about the Fed’s inaction.
The American jobs component has posted a positive trend gathering momentum since Wednesday’s release of the ADP private payrolls report announced a gain of 200,000 new jobs. Interesting to note the revision on August was not upward as was widely expected but a difference of 4,000 jobs. The September ADP figures mark a three month high after breaking two consecutive months of missed expectations. Thursday’s unemployment claims were slightly higher than anticipated, but again by 4,000, which does not erode the underlying strength of the employment data
The U.S. non farm payrolls (NFP) will be released on Friday, October 2 at 8:30 am EDT with a forecast of 202,000 new jobs added to the U.S. economy. Revisions to the August report are expected higher due to the end of summer’s missed deadlines. The NFP is the biggest economic indicator in the forex market, but the Federal Reserve’s interference and in an ironic twist “data dependency” have shifted the focus from the actual data to the interpretation of it. Not all data seems to be created equal when deciding the timing of the U.S. benchmark interest rate. The USD has been trading on the assumption that the Fed will raise rates sooner rather than later. The more the Fed delays the start of their tightening monetary policy the more the U.S. dollar will be under selling pressure.
US Employment Unable to Convince Fed on Rate Hike
Employment has presented the Federal Reserve a strong argument for the American economy recovery after the crisis. Steady gains in the number the jobs and a low unemployment rate have boosted the USD as an interest rate hike could not happen without either. In order to calm the market’s excitement as the headline employment figures recovered perhaps ahead of schedule the Fed introduced a more nuanced analysis. Monetary policy would depend on data, not just headline data. This introduced a more in-depth review of the components of American jobs which are mixed. Wages have not increased as much as the Fed would want them, putting no pressure on inflation. Labor participation is a delicate subject as there seems to be more jobs, yet people are being forced out of the workforce.
The August NFP was broadly expected to miss the mark as the end of the summer always leads to late submissions that are only added to the revisions a month later. The August jobs report was indeed lower than expected. The forecast for the September numbers is a bounce back after the summer doldrums and a healthy revision to the missed forecast in August.
The NFP report has narrowly missed forecasts in the months leading up to August, but revisions play an important part and the last two changes have been upward. The revisions to the numbers release last month will also be mentioned alongside the newly released figures.
The market did not sell the greenback with the last release of NFP as it was well understood the reasons for its underperformance. The NFP released on Friday, October 2 at 8:30 am EDT will not get the same benefit with its forecast of 202,000 new jobs. It should be no problem to break 200,000 as only the data released in August was unable to break above that number since April this year and September of 2014.
A strong NFP will put further pressure on the Fed. So far Chair Yellen and FOMC voting members sound hawkish when making individual statements with the majority hinting a rate hike before the end of the year is a strong possibility. Yet as a group there is a strong dovish tone to the FOMC statement. There was only one dissenter in the last meeting voting for a rate hike. The Fed has included language to explain its decision to hold rates attributing it to macro events outside American borders. This week’s developments out of China, Europe and Japan support the case for stronger macro headwinds.
The Fed has also hedged that statement by adding that those events have not changed the fundamental course of American monetary policy. This is also common knowledge, but at this point the Fed’s data dependency has trigged a timing dependency in the market. The timing of the rate hike has become more important that the rate itself in the short term creating undated volatility. The Fed has a chance to calm markets by adding transparency but has only offered contradictory statements and an unwillingness to commit.
Forex market events to watch this week:
Friday, October 2
4:30am GBP Construction PMI
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar