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Today’s NFP Report will be important for a data dependent Fed

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With December now being firmly cemented for a potential ‘rate hike’ from the Federal Reserve, the markets will be closely watching today’s Non farm payrolls report for the month of October. Expectations into today’s NFP release is for the US economy to have added 185k jobs while the unemployment rate is expected to fall further to 5.0%, which would mark the ‘full employment’ mandate from the Fed. In light of inflation staying consistently low, a decline in the US unemployment rate to 5.0% would mean a return back to the pre-2008 crisis era. The Federal Reserve will have something to cheer about should today’s NFP prove just that.

It is very much a possibility that the drop to 5.0% would be enough to trigger a stronger US Dollar in the short term basis; however there will be a lot more sub-components to look into while asserting the basis for a rate hike in December.

First off, the monthly employment change, expected to see a print around 185k will play a crucial role. This week’s ISM manufacturing survey was rather weak and indicated a potential decline in jobs from the manufacturing sector. However, the markets brushed aside concerns as the ADP Private payrolls printed a fairly decent number, but the ADP does come with a level of sampling error when it comes to forecasting the NFP numbers.

The unemployment rate of 5.0%, (expected) will no doubt be the main number to watch for. An expected improve will be very strong the US Dollar, while staying unchanged from last month’s 5.1% will see the markets focusing back on the monthly jobs.

Thirdly, the average hourly earnings will be another reading to watch out for. Estimates are, for the average hourly earnings to have increased 0.2% for the month, after staying flat previously while on an annualized basis, the average hourly earnings are expected to rise to 2.3% from 2.2% last month.

Combined, the expectations for today’s NFP report is biased to the hawkish side of the scale, when considering the expected unemployment rate and the average hourly earnings. A match or a beat on estimates would be more than enough to send the Dollar surging across the board.

The FOMC members, at least based on their recent comments maintain the view that December rate hikes remain a possibility. While Janet Yellen reiterated this view in her testimony, New York Fed President William Dudley also took the same stand. Dudley is a permanent voting member on the FOMC. The US Dollar is trading close to posting a 6-month high, trading at 98.17, above a 15-week higher close. A weekly close above 97.98 could see the trade weighted Dollar Index attempt another go at breaking the 100 resistance, which previously held on four attempts to break above this major psychological level.

To summarize, today’s NFP expectations are follows:

Data Expected Previous
Change in nonfarm payrolls 185k 142k
Unemployment rate 5.0% 5.1%
Change in manufacturing payrolls -5k -9k
Average hourly earnings m/m 0.2% 0.0%
Average hourly earnings y/y 2.3% 2.2%
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