March NFP Preview: It’s all about wages

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With the Fed signaling a slower pace of rate hikes and inflation now taking priority will today’s NFP report fail to gain the attention it usually gets?

With the Federal Reserve taking a dovish stand on policy today’s nonfarm payrolls report for the month of March couldn’t have come at a more crucial time. Broadly put, the NFP report today could see more downside risks than with Dollar gains likely to be limited in the near term. Overall, the March jobs report in the US is expected to show that the US economy continues to withstand the headwinds from a global slowdown and the financial market turmoil that started since the beginning of the year. A better NFP report is unlikely to see the Fed change its policy course when it meets next month in April, unless we get to see a blockbuster print.

The general market expectations for today’s payrolls report is for a 200k gains in jobs, a modestly lower estimates from February’s 242k strong print. However the estimates are in line with the consistent healthy labor market developments in the US.

US Unemployment Rate (4.90%, February 2016)
US Unemployment Rate (4.90%, February 2016)

On the unemployment rate, expectations are for an unchanged print of 4.90%, holding steady for the third month in a row, closer to the Fed’s 4.80% projection from the FOMC. A surprise print of 5.0% could upset the markets initially but if supported by an increased participation rate which is 62.90% would be a welcome change for the Fed.

US Labor Participation Rate (62.90%)
US Labor Participation Rate (62.90%)

Most importantly, wage growth will be the focus especially if the headline data comes in line with expectations. Forecasts are for average wages to grow 0.20% in the month of March, following a slower pace of increase of 0.10% in February. On a year over year basis, average earnings are expected to remain steady near 2.20%.

Earlier this week, the ADP payrolls data released saw a better than expected print with private firms adding 200k jobs, more than the forecast estimates of 195k. However the Dollar failed to rally much on the data. Although it is know that the ADP doesn’t closely mirror the NFP print, the market reaction to the report says a lot as to what to expect from today.

The downside risks of the NFP print missing estimates remain high against the backdrop of a weaker US Dollar and to the upside, only a surprise such as an unexpected drop in unemployment rate and a 200k+ jobs report will take the markets to react mildly to the data.

The markets will not just be focusing on the NFP data today as the US ISM manufacturing PMI will be released later in the evening. Estimates point to the ISM manufacturing index to rise to 50.8 in March, up from 49.5 in February. A move above the 50 index will be cheered by the markets after the ISM manufacturing index remained below 50 indicating contraction for nearly four months.

Yesterday, the Chicago PMI beat expectations strongly, rising to 53.6 from 47.6 in February. The business barometer surged as production and employment pulled the index higher with producers reporting an upturn in demand. The Chicago PMI broadly reflects the general marked improvement across the US largely due to the weaker US Dollar which has helped boost exporters.

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