The Jobs Report Will Arrive as Market Uncertainty Rises Due to China and Oil Price Fears
The employment component has been the strongest pillar of the U.S. economy. Despite strong growth in the monthly job reports the U.S. Federal Reserve was patient and finally hiked interest rates in December 2015. With that major decision out of the way the market is now focused on when the next rate hike will come and how often the central bank will tighten monetary policy. The minutes from the Federal Open Market Committee (FOMC) meeting in December were released on Wednesday, January 6 showed a cautious central bank. Gone were the confidence and swagger from Fed Chair and members leading up to the rate hike announcement. The word “gradually” took center stage as it describes expectations of a slow pace of growth of economic activity and inflation would warrant a measured pace of rate hikes.
There was a familiar use of data dependency language that will guide the actions of the Federal Reserve. Given how Fed policy members themselves do not see a rapid recovery, the data is more likely to underwhelm going forward putting into question the real possibility of 4 rate hikes given how long the market had to wait for the one in December. The U.S. non farm payroll (NFP) will be published on Friday, January 8 at 8:30 am EST. The USD will await the report and the market reactions given the high levels of uncertainty after a volatile first week of 2016.
The EUR/USD has gained 1.325 percent in the last 24 hours. The pair has witnessed a volatile trading week moving more than 2 percent between the high and low in the past 4 days. The EUR has appreciated after the muted FOMC minutes were released putting the pressure on the European Central Bank (ECB) to step up its quantitative efforts to avoid the threat of deflation. The EUR/USD is on course to touch the 1.10 resistance level as it trades at 1.0928.
The NFP is expected to print 200,000 new jobs added in December. If the final report misses the mark investors will look for a higher EUR as the USD will be sold off as the Fed will be less likely to hike rates in the short term.
The CME Group FedWatch Tool uses 30-day Fed Fund rate prices to measure the probability of a rate change. The latest data points to a 90.5 percent the rate will remain unchanged at the next FOMC meeting on January 27.
Fed policy members have again issued contradictory statements after the FOMC. The biggest insight that the FOMC brought was the fact that although the decision to hike was unanimous the majority policy members were not fully onboard until the last minute. That leaves a more contentious debate going forward as the other big topic discussed in December was inflation.
Chicago Fed Charles Evans was pessimistic about reaching the Fed’s inflation target and expect lower rates to continue if the U.S. remains in a low inflation environment. In the other end of the spectrum is Richmond Fed President Jeffrey Lacker who sees the possibility of even more than the four rate hikes forecasted by the Fed. Of course for that to happen there would have to be a turnaround in the price of oil and less uncertainty in the currency markets. Then inflation would rise above the target and the Fed would have to intervene more than expected. This of course is a very unlikely scenario as oil prices do not seem to have hit bottom and the disagreements between Iran and Saudi Arabia have added to the oversupply issues pushing the price to near $30.
The NFP could provide the balm that stabilizes the market as it calms investors nerves after a volatile week. Expectations are high at more than 200,000 new jobs, but possible given the pace of the growth of employment. The USD needs a solid NFP number to rise as the market has already priced in an acceptable 180,000 to 200,000 range. Coming below that range would hurt the USD as the market is looking for reassurance that the U.S. economy is still on the path of growth specially given the global anxiety gripping equity markets.
USD events to watch this week:
Friday, January 8
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
8:30am CAD Employment Change
8:30pm CNY CPI y/y