It’s been a relatively quiet start to the European session on Friday, with risk aversion being the preferred option for traders ahead of yet another key U.S. jobs report.
We’ll quite often see traders take a cautious approach to the markets ahead of the labour market figures and today is no different. I don’t think Wednesday’s ADP number helped matters, falling well short of expectations and only adding to the narrative that the economy is not in a position to warrant another rate hike. In reality, unemployment is at 5%, the economy had added almost 225,000 jobs per month on average since the start of last year, the core PCE price index is only just shy of the Fed’s target at 1.6% and the only thing that’s lacking is strong wage growth.
While I think it would take a truly outstanding report to get the markets on board today, given that its currently so convinced that June is off the table, I don’t think the Fed will need to see that. Moreover, I think the Fed will be more focused on wages given that this is what is needed if we’re going to sustainable growth and higher levels of inflation. That said, if we continue to see good jobs growth, falling unemployment and rising participation, I think the Fed will be happy to persist with rate hikes on the expectation that wage growth will follow.
We heard from a number of Fed officials yesterday and broadly speaking the message seems to have been the same. That the decision remains data dependent but as of now, June is a live meeting. The markets are just refusing to believe it at this stage. The problem is, if the Fed fails to communicate this properly, it could find itself in a position come June in which it wants to hike but is unable to due to the chaos it would cause in the markets.
Also to come today we have the Canadian employment data, released alongside the U.S. jobs report and the Baker Hughes U.S. oil rig count. Given how volatile oil has been, especially following the Canadian fires this week which is reported to have led to around half a million barrels per day going offline, it will be interesting to see how traders respond to this data. Oil has had limited upside recently, even with those potential Canadian supply disruptions so I imagine the path of least resistance could be to the downside, particularly in the event that the data shows rigs coming back online.
For a look at all of today’s economic events, check out our economic calendar.