What will the data look like on Friday and most importantly how will it influence the market?
The US-Non-Farm Payroll data is the most powerful number among the economic data and certainly has the ability to move the market in either direction. Fed watchers pay close attention to this number and this number serves as one of the most important pillar for the Fed’s economic policy. So far there has been one clear trend from the Fed which is that the Fed has repeatedly lauded the economic data and called it “remarkably positive”.
So, the question that we ask ourselves is: what will the data look like on Friday and most importantly how will it influence the market?
Before I get into the nitty-gritty of the payroll numbers, it is critical to talk about the current state of the dollar index. If we measure the strength against the basket of G-10 currencies, it confirms one fact- the dollar is much stronger currency in 2018. Why is this? Thanks to the Federal Reserve’s hawkish monetary policy. The Fed has increased the interest rate three times this year which brought strength for the dollar.
The intriguing element is that the Fed is not done yet, there is still more to come. The reason for this is that the economic indicators are still rock-solid and there is no reason for the Fed to back down.
This message was echoed in the Fed Chairman’s latest comment. Jerome Powell, who is the Fed Chairman, stated yesterday “the Fed needs to adopt the policies according to the country’s economic health. The U.S. is no longer in the financial crisis malaise, it is time to bring the interest rate towards their neutral level”.
This indicated two elements: first, the Fed doesn’t think that they have achieved the neutral interest rate level despite the fact that we have experienced three rate hikes this year. In other words, more rate hikes are on the way. Second, comments like this show that the Fed is confident about the economy. His statement “There’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely,” is remarkably hawkish.
If we dive further into his comments yesterday and try to dissect the neutrality part, it makes affairs even more arduous. The question which comes to mind is that what is the neutral level? Several officials have talked about this critical issue and I think the neutral level for the Fed is 3.4%. The projections released last week shows that the interest could move towards the 2-2.25% but it is highly likely that the Fed may not pause their game anytime soon until they reach the level of 3.4%.
The fact is that the US weekly jobless claims data has dropped to the lowest level since 1969. According to the ADP research institute, American business added the most workers in seven months and this is all in the midst of the so-called- trade war. So, the only number which can make the Fed leavened their rosy remarks on the economy further will be the US-NFP number.
In simple words, the expectations for the US NFP number are sky high. The expectations are for 185K but the speculators are hoping for a number above 200K. But, the two most important number that traders will be looking at are the average hourly earnings number and the underemployment number, this is an indicator which represents the people who have given up looking for a job or in other words slack in the labour market. We know that Jerome Powell has already said that he pays special attention to the average hourly earnings number. The expectation for the average hourly earnings m/m is 0.5% while the previous reading was at 0.4%. The underemployment number printed a reading of 7.4% and if this number comes at 7.1%, it will be immensely positive for the dollar.
The key takeaway from this is that, expectations are sky high and there are higher odds for disappointment and this calls for action; adjust your risk to reward ratio.
