• Joel

How Does The Fed See NFP?

Softness in manufacturing, trade uncertainties and the associated low levels of business investment, combined with persistently low inflation were enough to justify last year’s rate cuts. However, the resiliency of the rest of the economy, as seen most recently in Tuesday’s strong ISM Non-manufacturing data, is preventing any further cuts. Forgetting about the manufacturing sector then, which only makes up a small percentage of the US economy, Friday’s employment report is expected to serve as further evidence of the US’ broad economic resiliency.

Wall Street expects a “Goldilocks” report, with nonfarm payrolls growing by 164k, unemployment holding steady at 3.5%, and wages up 3.1% over the past year. (Goldilocks data is essentially when the data is good enough to keep markets happy about the health of economy, but not so good that Central Banks start hiking rates, which is generally bad for risk assets such as stocks and is bullish for the country’s currency). Should the data come in as expected, the Fed will see this as consistent with solid but not spectacular trend-like growth with no reason to believe the economy is overheating or will soon overheat. I.e. a goldilocks report.

What about if the data comes in way better, or worse, than the expected range of estimates? As usual, the report will have to be taken in its entirety (traders will have to consider not just the headline number, but also average hourly earnings growth and the unemployment rate). Generally speaking, though, a higher headline and average hourly earnings number and lower unemployment rate are associated with USD strength and vice versa.

From the Fed’s perspective, NFP data is sufficiently noisy on a month to month basis that no single data point would change the overall story for them. Instead, they look for patterns in the data that threaten to send unemployment higher to justify a rate cut. In that sense, a single weak report would likely not do that in any meaningful way, rather, two or three consecutive weak reports would be more interesting.