It would appear we’re going to see risk aversion in the markets on Friday ahead of what is clearly a very important jobs report for the U.S., the final one before the September meeting of the Federal Reserve in under two weeks.
This cautious approach prior to such a key release is quite common in the markets, especially when this release could determine whether we see a change in monetary policy, on this occasion the first rate hike in almost a decade. Ordinarily I would suggest that we don’t get too carried away with one release in isolation as alone, it’s unlikely to have a significant impact on policy makers decision making, but on this occasion it may.
Stanley Fischer, vice Chair of the Fed, said so much last week in an interview at Jackson Hole. Policy makers have a very difficult decision on their hands at this meeting and recent events in the markets have only made their decision harder. The decision could well be on a knife edge and that’s what makes today’s data so important, it could swing it in either direction.
As always, there’s going to be an emphasis on the non-farm payrolls reading and the unemployment rate as they’re the ones that tend to write the headlines. We’re expecting 220,000 jobs to have been created in August which is good, although nothing to write home about, and the unemployment rate to fall to 5.2%.
These figures are consistent with a tight labour market. While people constantly point to the lack of inflation in the U.S. right now and the possibility of further deflationary pressures if rates are hiked, a tight labour market together with higher levels of productivity, as seen on Wednesday, should create the environment for wage growth and future price inflation. And the Fed bases its decision making on inflation expectations, not necessarily current inflation levels.
Average hourly earnings data is also very important as this gives the clearest indication that inflation is likely to rise. Put simply, if wages are rising then these additional costs are likely to be passed on to the end consumer, creating inflation. There has been a lack of this in the U.S. and the second quarter was not good for wages as companies sought to keep costs and prices down to offset the negative impact of the stronger dollar. A sign that this is improving in the third quarter could be as important as another strong NFP and unemployment reading, when it comes to the decision in two weeks.
The fact is, rightly or wrongly, investors are going to look to today’s data and view it as either the final nail in the coffin for a September rate hike or the data that puts it back on the table. With that in mind, I would expect to see a lot of volatility around the release.
For a look at all of today’s economic events, check out our economic calendar.