Markets head into tonight's figure expecting 175,000 new jobs and unemployment steady at 4.9%

Trend job growth has slowed in the US this year. Over the six months to August, job growth averaged 180,000 per month. This is down 17% from the same period last year.

This slowing may simply reflect a maturing business cycle. The US economy has now had a post GFC expansion period of 7 years. Typically, more new jobs are created in the early stages of recovery. At that stage businesses are restoring production that was cut during the downturn. However, the level of job creation tends to decline as the cycle matures and the impact of the initial "catch up" phase passes. 

Even though the trend has slowed, recent job growth has remained good enough to cover population growth. At 4.9%, the unemployment rate in August was unchanged from 6 months ago and down from 5.1% a year ago.

Underemployment remains a problem. There is still a vast army of part time and marginally employed workers wanting more work than they can find. The Underemployment rate has also been steady over the past 6 months but remains high at 9.7% of the workforce.

On top of all that, economists estimate there is a large pool of people not even registered as unemployed who do actually want to work. Janet Yellen believes this could be as high as 2 million people. All this "spare capacity" has helped keep a lid on wage growth. 

So there’s a long way to go before everybody has as much work as they want. However, the Fed’s job is about balancing the risks of employment and inflation.

It appears to be coming to the view that the economic cycle and job growth have arrived at the stage where they can withstand a further gradual increase in interest rates as long as the Dollar is not pushed too high.

At the same time, risks may gradually begin to tilt towards an increase in inflation. Core services inflation in the US in areas like healthcare and rents have been picking up for some time. At the moment this is being offset by weak imported goods prices. Now, with oil showing signs of stabilising and gradually picking up, this offset may diminish, providing a welcome increase in overall inflation.

All up the Fed looks to be very close to the point where it sees the balance of risks between jobs and inflation as justifying a rate hike this year. Strong jobs data tonight could go a long way toward towards cementing this position.  Markets are pricing a 64% probability that it will lift rates by December but this is likely to increase if the trend jobs growth increases. This is the background against which traders head into tonight’s NFP data. 

The jobs data is notoriously volatile which means that the best way to assess what it means for the Fed is to look at overall trends. Bear in mind also revisions to the last 2 months data are released with the current figures. These can either offset or add to the impact of any beat or miss on the headline number.

The market goes into tonight's data in an interesting situation. We have seen a significant sell off in US bonds and an associated rally in the US Dollar and sell off in gold as traders look to position for gradually higher US interest rates.

The US 10 year bond chart could be critical tonight. It is starting to break below support and the 200 day moving average. If this break is really confirmed tonight, we could see downward momentum fuelled in this key market. That could lead to further selling of gold and buying of the $US

While weaker than expected job growth could see support in bonds hold, the risk in this direction may not be as great unless there is a really big downside miss. A softish number tonight would probably not make too much difference to Fed thinking on trend job growth. It might stop the Fed hiking in November but it would probably take a pretty large miss on jobs data to reduce expectations for a December rate hike