The hype around the coming Non-Farm Payroll (NFP) result just got more intense following the disappointing ECB meeting and the markets stark reaction. Subsequently, the question remains, will the NFP figure live up to the Fed’s rate hike rhetoric or is the USD destined for a sharp correction as air rapidly exits the balloon?
The much awaited ECB decision on QE has left the market wondering where exactly central bankers are going with their policies. The market largely took ECB President Mario Draghi at his word and expected an increase to the asset purchase program, along with a cut to the EU minimum bid rate. However, what they got instead was plenty of reasons to distrust the central banker’s future comments as QE was extended with no other policy action. In response, there was sharp volatility seen across the markets as the focus now shifts to the US Non-Farm Employment Change result.
The NFP result is likely to be an important one given that it is the last major labour market indicator to hit the wires prior to the US Federal Reserve’s FOMC meeting. It is also one of the most difficult numbers to predict given that US economic indicators have been a mixed bag throughout most of 2015. In particular, US growth revisions and a sharp rise in the durable goods orders are moderated by a poor showing in manufacturing and non-manufacturing PMI’s.
Subsequently, the jury is still out as to whether a strong number is likely to be proffered or weakness will abound. Given the current absence of slack in the US labour market (at least when considering raw employment numbers) it is difficult to see where a potential 260k+ result could possibly come from.
In fact, forecasts have the NFP result at 200k in comparison to the prior months unexpected 271k. However, especially after the lack of decisive action by the ECB, markets will be looking for a strong US labour market result to balance the equation. A weak result could cause the air to come rapidly rushing out of the bubble as the path towards a rate hike by the Fed becomes relatively complicated.
Subsequently, the strong focus upon the potential for an increase to the US Federal Funds Rate is what makes the NFP result so critical. Over 70% of surveyed economists believe that the central bank will pull the trigger and hike rates this year and statements from the Fed have supported this view. However, as we have just seen with the ECB, communication and signals often differ strongly from the actual outcome.
There is a real risk that, regardless of the data, a move to delay a rate hike could damage the institutions credibility and subsequently cause a sharp swing in sentiment against the USD. Market expectations have been set based upon the myriad of FOMC members giving hawkish statements and, subsequently, any dovish action could see markets reeling. In this scenario, a USD depreciation of between 10-15% would not be unthinkable.
Subsequently, the NFP result will be surrounded by a greater than normal level of volatility and the USD is likely to lack a reliable trend until after the FOMC’s decision is announced in a few weeks. So review your positions for risk and, like the rest of us, hold your breath until the venerable central bank lets us in on their future policy direction.