NFP Could Turn Hike Possibility into Reality

December Employment Data to Decide December Interest Rate Hike Fate

The statement for the October Federal Open Market Committee (FOMC) meeting rekindled the possibility of an interest rate hike by the Federal Reserve. By adding “at its next meeting” the Fed made the market sit up and take notice on the December FOMC meeting. Chair Yellen has struggled with how to best communicate the intention of the central bank in a volatile market with headwinds growing stronger.

The USD has gotten a boost versus major, with only commodity pairs aided by the surge in oil prices able to resist the rise of the greenback. The FOMC statement and Chair Yellen’s testimony on Wednesday have made an interest rate hike in December a live possibility. Economic data has been positive overall. A narrower trade deficit than expected and impressive non-manufacturing PMI results have validated the Fed’s comments even as the ADP private payrolls and unemployment claims slightly missed expectations ahead of the non-farm payrolls (NFP) report.

The NFP is the biggest indicator in forex and is forecasted to show 179,000 new jobs. The convergence of a hawkish Fed that has marked December as a possibility and a strong NFP could result in the arrival of the much-awaited interest rate hike. The U.S. Department of Labor will publish the report on Friday, November 6 at 8:30 am EST.

The October FOMC did not have a press conference following it, so the language had to be more carefully crafted as Fed Chair Janet Yellen would not have a chance to explain to reporters while addressing their questions. The two major changes to the FOMC statement from September were the reduction of the emphasis on overseas factors which was changed from a paragraph into a sentence in another part of the document. The second change was the addition of “whether it will be appropriate to raise the target range at its next meeting”. The line with the new additions in the statement reads:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

The Jobs component had been the firmest pillar on the U.S. economic recovery argument, but after the summer, it has stumbled over increased expectations. Even before the Fed announced its plans to taper the quantitive easing program, forecasts around employment had become a problem for the Fed. Relying on the headline employment growth and rate that quickly recovered obfuscated the true health of the economy. Even with that knowledge the Fed has not managed the market expectations well as of all 2015 have produced disappointing FOMC meetings as the Fed is not willing to confirm or denny if they will finally raise rates as expected.

The new line in the FOMC statement points to the possibility of a rate hike but it is not a certainty that the central bank will make a move. That uncertainty has keep the pressure on for several central banks and those that can afford to be patient will, while for other it could mean easing monetary policy sooner rather than later, specially if they were counting on the Fed to make the first move.

The NFP is forecasted to come in at 179,000 new jobs. Last month when higher than 200,000 was expected the jobs report shocked with 142,000 jobs added and to make matters worse the August figures were downgraded to 136,000. The market is now expecting less than 200,000 new jobs for the third time in a row. The fact that the job gains keep coming has reduced the unemployment rate which is now at 5.1 percent and not expected to change.

USD events to watch this week:

Friday, November 6
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza