Analysing market reaction on non-farm payrolls day can be a challenging process at the best of times but it has become even more so in recent months now that the Federal Reserve has pulled the trigger on its first rate rise in seven years at the end of last year.
Their actions at the end of last year were expected to precipitate a succession of rate rises, however the recent slowdown in the global economy, and the weakness in commodity prices has prompted a reassessment of that expectation in so far as there remains a great deal of uncertainty about whether the Federal Reserve will be able to implement any move on rates at all.
As traders we first need to understand what the market is focussed on, as on the basis of the jobs numbers under previous guidance the Federal Reserve would probably have raised rates more than once by now.
This is where the importance of their dual mandate comes in so much as they also have a mandate on inflation and like most global central banks they have been missing this one on a consistent basis for over five years.
Knowing this and the tone of the rhetoric of a number of Fed policymakers the attention of the markets has shifted to wages and price data, none of which has been particularly encouraging.
This has made the process of pulling together the narrative of various Fed policymakers, and the importance of prices data that much more difficult.
In this context it is therefore advisable to look at the various data points and decide on what the market might do in the event they either beat expectations, which come in better than expected, or miss expectations, by coming up short.
The current expectation is that markets think it unlikely that the Fed will raise rates in June so what we are looking for from Friday’s payrolls report is evidence to either support that belief or undermine it.
With that in mind as traders we therefore have to decide what type of data we would want to see to shift the odds in favour of a possible rate rise in June. This shouldn’t be difficult but on occasions the markets can react in entirely unpredictable ways.
A decent jobs number on its own is unlikely to move the dial much with an expectation of 200k new jobs in April, with a number 50k either side of that unlikely to be viewed as particularly US dollar positive or negative.
If the unemployment rate were to rise from its current 5% that wouldn’t necessarily be viewed as negative if it were accompanied by a rise in the Labour participation rate, which is near multi year lows. This would simply mean that more people had returned to the workforce and were looking for work, which in a perverse kind of way could be argued as being positive.
As stated previously the jobs numbers are of secondary importance here, when set against wages data, which despite a spike in January have remained stubbornly weak.
A bigger than expected rise in average hourly earnings for April towards 2.5% on annualised basis, or 0.5% month on month, could well illicit a sharp rise in the US dollar, even if the jobs data disappoints, or there are some negative revisions.
This is because the market assigns a greater probability of the Federal Reserve shifting position on rates if prices or wages start to show signs of rising than if the jobs data starts to slow down.
If, on the other hand all data points come in weaker than expected then expect to see the prospect of a June rate rise recede even further into the distance. In the event this happens we can probably expect to see the strongest reaction in USDJPY, gold and EURUSD, as the US dollar weakens further.
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