Investing.com – All eyes will be fixed Friday on the publication of the June jobs report which is expected to continue to show a strong U.S. labor market but further has the potential to shift market expectations for the future path of monetary policy.
The U.S. Labor Department will publish the release at 8:30AM ET (1230GMT) on Friday.
The consensus forecast is that the data will show jobs growth of 179,000 last month, following an increase of 138,000 in May.
Morgan Stanley however has a lower estimate because the broker believes that there is a lack of supply.
“Surveys and other indications of hiring intentions have remained positive, but reports of labor shortages remained widespread,” these experts explained in a note to clients.
“We expect lack of available workers to restrain job growth again in June to 150,000,” they added.
These analysts feel that even that number would be “unsustainably strong” as they do not see “a lot of excess discouraged workers left at this point broadly measured” and their best case scenario is a stable participation rate.
“If so, the pace of job growth consistent with a stable unemployment rate with a stable participation rate is 100,000 a month, and at 150,000 the unemployment rate would fall a tenth every three months and be below 4% early next year,” they said.
Morgan Stanley agreed with the consensus that the June report will the unemployment rate hold steady at 4.3%, a 16-year low.
In the meantime, another key data point that many experts are focusing on for the June report is wage inflation. Economists expect average hourly earnings to rise 0.3% after gaining 0.2% a month earlier, which in turn would boost the annualized rate of increase to 2.6%, from the prior 2.5%.
Despite the U.S. labor market widely being considered to be at full employment, wage inflation has been subdued.
Economists generally tout that an annual wage increase of 3% to 3.5% is needed to lift general inflation towards the Federal Reserve’s (Fed) 2% inflation target.
Fed chair Janet Yellen herself stated in the press conference following the last policy meeting in June that “wage inflation has picked up somewhat”, but admitted that “it remains low.”
Data points that could alter Fed policy plans
The Fed has embarked on gradual policy tightening as it begins to be concerned that its accommodative policy could begin to have a negative impact on the economy.
As part of that normalization process, it already hiked rates twice this year and projected that there would be one further increase in 2017.
The central bank further announced a plan to wind down asset purchases, reducing its $4.5 trillion balance sheet.
In order to follow through on these plans, Allianz chief economic adviser Mohamed El-Erian believes that “the Fed needs to see further evidence of low and declining slack in the labor market.”
In an opinion piece written for Bloomberg, El-Erian said that Friday’s job report would need to provide evidence of wage growth heading towards an annualized pace of 3% or more, a steady state of job creation that he defined as in excess of 80,000 to 100,0000 posts per month, a drop in the more comprehensive U-6 unemployment rate and a relatively constant participation rate.
“If this is what the jobs report contains on Friday, markets will need to price more seriously the likelihood that the Fed will deliver on its policy guidance, starting with initiating the process of shrinking its balance sheet, together with another hike in the remainder of the year,” he concluded.
Markets ahead of the report at 3:01AM ET (7:01GMT):
Ahead of the publication of the jobs report, Fed fund futures priced in the odds of a rate hike in December at 49%, according to Investing.com's Fed Rate Monitor Tool.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, advanced 0.16% at 95.73.
EUR/USD slipped 0.0% to 1.1416, GBP/USD dropped 0.08% to 1.2959, while USD/JPY gained 0.49% to 113.77.
Gold futures for August delivery on the Comex division of the New York Mercantile Exchange dropped 0.15%, or $1.81, to $1,221.49.
The yield on the 10-year Treasure was up 1.3 basis points, or 0.55%, at 2.382%.
U.S. stock futures pointed to a flat to higher open. The Dow futures edged forward 0.03%, the S&P 500 futures inched up 0.06%, while Nasdaq 100 futures rose 0.15%.