February NFP – What The Markets Should Be Looking For

It’s the first Friday of a new month and that means only one thing – it’s non-farm payroll (NFP). All eyes will be front and center when February’s U.S monthly jobs report is released in a few hours.

The NFP headline print will round off a week that has seen the USD come under some renewed pressure. It slipped against its peers, including the EUR and GBP, after Thursday’s mixed U.S data.

February’s ISM services index was more or less flat with the January reading, however, the employment component fell into contraction for the first time in two-years. Also adding pressure was the final February Markit services PMI dipping into contraction.

As per usual, investors and dealers will be searching for clues for any re-pricing of Fed policy expectations.

To trump concerns of global growth and continued financial stability, today’s NFP report needs to show healthy job additions, higher wage growth and a labor participation rate showing further traction.

NFP requires the above three specific “prints” to convince the market that the U.S recovery, albeit tepid, remains on track. Any healthy combination of the three would go a along way to reduce the current market speculation that the Fed is about to do a U-turn and change monetary policy. A healthy read will keep the door ‘slightly’ ajar for a Fed rate increase later this month (March 16) – something that the market disagrees with.

When it comes to the report do not just look at the headline print – the details and backwardation is just as important.

Headline: An NFP with a headline print of +180k or more will indicate that the Fed does not need to worry too much about the U.S’s labor market conditions just yet. A ‘big’ miss either side of expectations will only heighten market volatility. Anything close to expectations and this market may want to close up ‘shop’ for the week early.

Wage Growth: The U.S’s impressive growth in jobs has generally not translated to meaningfully higher wages, at least until now. The jobs report for January suggested that this might be changing. Any improvement in pay, along with a gradual recovery in the labor participation rate, would lead to higher consumption.

The U.S still needs to move the needle on wages. Long-term inflation expectations are the lowest in eight-years. Average hourly earnings need to show a monthly gain of +0.2% and then some. Anything on the “positive” side will have fixed-income dealers repricing current yield curves.

From the Fed’s perspective, any labor-market improvements would encourage U.S policy makers to continue with its careful process of monetary-policy normalization. Currently, the market seems to be at odds with the Fed’s ‘dot-plot’ projective. Futures prices indicate only one possible rate hike and that’s in December, and not the supposed three +25bp moves that the Fed has alluded to in their projections.

Participation rate: It still hovers near historical lows – 62.6%. It’s healthy to see it edge higher even if it does happen to push the unemployment rate up (+4.9%). It would be considered a positive indicator of a healthier U.S economy.

Ideally, all three or a strong combination, would suggest that the U.S economy is not in danger of derailing any time soon, well at least until next month. A healthy print would instill some much needed market confidence, confidence that has so far taken a massive hit so far this year.

Any optimistic data will obviously favor the dollar – the surprise support for the EUR, GBP or JPY will come from a much weaker headline or deeper revisions.

Anything close to expectations and the markets attention will quickly shift towards Central Bank monetary policy announcements – the Bank of Canada March 9, the ECB March 10, Bank of Japan March 15, and FOMC March 16.

Currently, the odds of a cut by the BoC are running at about +15%. For the FOMC, the markets see only a very small chance (+10%) of a rate hike, while the ECB could see more cuts into negative rates territory and/or extension of its QE. The BoJ’s Governor Kuroda reiterated that Japanese policy makers stand ready to lower NIRP further if necessary.

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