The all-important monthly US non-farm payrolls report is released tomorrow at 13.30 UK time. This data point is always a key event for markets, and this is especially the case for the March report. Policymakers are eyeing up a June rate cut but the economy continues to remain relatively solid with GDP currently not requiring policy easing at this point.
A less robust labour market report is expected and is the main risk, as highlighted by Fed Chair Powell at the recent FOMC press conference. Consensus sees headline NFP at a more trend-like 212,000 in March. This would be lower than the 275,000 in February and the 12-month average of 229,000. Markets will be on guard for revisions again, after the big negative adjustments (167,000) in January and February. This effectively left the net headline figure with just over 100,000 job gains in March. Average hourly earnings are expected to tick up to a more normal monthly pace, following the very weak February print of 0.1%. The unemployment rate is predicted to stay below 4%.
Other labour market data
This week’s ISM employment indices in both manufacturing and services came in below 50. This indicates falling employment levels, although the correlation with NFP has loosened substantially in recent times. The downward trend in JOLTs vacancies slowed, but the quits ratio is marginally encouraging as it implies the labour market is gradually balancing. It also suggests easing wage growth to a pace compatible with the Fed’s 2% inflation target. Wednesday’s ADP private employment beat estimates, but this is notoriously poor at predicting NFP.
Implications for Fed policy
The March FOMC meeting saw policymakers adjust their language to acknowledge the recent strengthening in data, stating that “Job gains have remained strong and the unemployment rate low”. The median jobless rate forecast was adjusted slightly last month in the economic projections to 4.0% in 2024, from 4.1% previously in December.
Chair Powell said at that meeting that strong job numbers may not be inflationary so would not necessarily derail rate cuts. More recently, he has said the Fed is in no rush to ease policy and is on track to lower policy at some point this year. Futures now give a first 25bp rate reduction in June a 60% chance. But having priced in over 80bps of 2024 Fed easing at the start of this week, traders now predict under 70bps. This is less than the three 25bp rate cuts seen in the Fed’s March median dot plot.
Market reaction
Some weakness in the headline NFP print should help make the case for a first rate cut in the coming months. A spike in the jobless rate would also give the Fed another nudge towards to a June move. In this scenario, the dollar might turn lower on a cooler data.
But another strong report would mean markets start pricing in less policy easing this year. All things equal, that could push yields and the USD higher while stocks and gold could struggle to sustain their recent rallies.
Here are the numbers to know:
