Today is 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 March’s U.S monthly jobs report is released at 08:30 EDT.
The NFP headline print will round off a week that has seen the USD come under renewed pressure after Fed chair Yellen’s somewhat surprising Economic club speech in New York on Tuesday. The market has been interpreting Yellen’s remarks as ‘overtly dovish,’ suppressing the more hawkish comments of other recent Fed speakers over the past fortnight. Naturally, this is penalizing the ‘mighty’ U.S dollar as investors unwind the currency’s rate differential premium, while flattening the U.S yield curve.
The EUR has hits a two month high of €1.1409 in the wake of Thursday’s eurozone flash inflation data for March (core-inflation rose to +1.0% y/y). Any further advances would mark the single currencies highest level in more than five-months.
The yen (¥112.29) continues to build upon gains established after Japan’s PM Abe failed to mention any extra stimulus measures for the upcoming fiscal year this week. Also overnight, a Bank of Japan (BoJ) survey published showed business confidence fell to its lowest in three years, amid soft external demand and a stronger yen, despite aggressive easing measures by the country’s central bank. Elsewhere, the Fed’s dovishness has Emerging Market currencies trading at new multi-month highs against the greenback.
Typically, investors and dealers would be searching for clues for any re-pricing of Fed policy expectations. But this week’s Fed rhetoric has squashed U.S rate normalization occurring any time soon. So what is it that capital markets should be looking for in non-farm payrolls (NFP)?
In a utopia world, to trump concerns of global growth and continued financial stability onlookers require the U.S’s jobs report to show healthy job additions, higher wage growth and a labor participation rate showing some traction. Because all of the three variables rarely move in unison, the primary focus of the market was to concentrate on job growth. With the U.S consistently ticking that box for the past year, the markets naturally shifted its focus to 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 and February suggested that this might be changing, albeit slowly. Any improvement in pay, along with a gradual recovery in the labor participation rate, is expected to 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.
With non-farm payroll (NFP) ticking, or partially ticking off, the first two variables of a ‘utopia’ economy, investor’s primary focus should really shift to labor-force participation and the related employment-population ratios.
The U.S participation rate continues to hover near its 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.
The same goes for the employment-population ratio. It has fallen from +62.9% at the beginning of the financial crisis in 2008 to a historical low of +58.2% in 2011. In last months report it stood just above its record low at +59.8%.
A strong economy views a continued steady rise in both labor force participation and the employment-population ratio as a natural byproduct – it’s the proof of stronger economic growth and prosperity.
One would like to think that these positive signs would make Yellen’s job a tad easier. The gradual rate normalization message that the Fed seems to have muddled since last Decembers rate hike would again be back on the table. Stronger participation numbers would naturally lower the probability of any inflation surprise and get the Fed’s initial ‘dot-plot’ message back on track.
When it comes to the report do not just look at the headline print – the details and backwardation is just as important.
An NFP with a headline print of +195k 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.
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 taken a hit so far this year.
Any optimistic data will obviously favor the dollar – further support for the EUR, GBP or JPY will come from a much weaker headline or deeper revisions.