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US NFP Expected to Show Cooling Continues

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The consensus among economists is that September’s NFP data will be in line with the previous three months. This is relevant to the outlook for the dollar, because of comments from Fed Chair Jerome Powell in the aftermath of the last policy meeting.

The Fed decided to hold rates steady, but imply another hike is likely in the next couple of meetings. One of the factors in the balance for that next rise in the rates is if the labor market remains tight. Powell seemed to suggest that the labor market is balancing out, which would imply that rates might stay steady at the current level.

The key levels to watch out for

Last month, the unemployment rate unexpectedly jumped, driven by a surge in the labor force participation. Powell’s comments specifically were addressing that situation, which has left some analysts to conclude that if the jobs numbers remain under what was reported last month, that pushes for there being no rate hike at the next meeting. That could leave the dollar a little bit more weakened.

On the other hand, the dollar has been gaining quite a lot lately as traders price in a surprisingly resilient US economy. That has helped keep interest rates high as it leaves room for the Fed to keep tightening for an extended period of time. Stronger labor figures would imply the economy continues to be strong, and could keep fuelling that dynamic. Even if the market isn’t convinced that the Fed will actually pull the trigger on more rate hikes, yields could keep drifting higher on improved economic sentiment. That could end up supporting the dollar either way.

What the forecasts say

The bottom line for the currency markets is that the US economy remains the better relative performer among the big countries. China is facing a housing problem. The UK and Europe are struggling with sluggish growth due to high energy prices. Despite the political turmoil in Washington that has once again raised the possibility of another flirt at a government shutdown – after narrowly avoiding one a couple of days ago – the dollar could still be supported.

Economists expect the US to have added 168K new jobs in September, down slightly from the 187K reported last month. Though it’s become routine now that the prior months get revised down. The unemployment rate is expected to moderate a bit, ticking down to 3.7% from 3.8% after summer jobs might not roll over. However, the labor force participation rate is expected to be at the same rate as last month, which was a return to pre-pandemic levels.

The underlying distortion still remains

Earlier in the week, the JOLTS report showed a surprise jump in the number of open jobs by the end of August. 630K new jobs went unfilled, according to the BLS, despite the increase in people looking for work. Although this might represent a sign of increasing labor market tightness, analysts have cautioned it might be a one-off due to seasonal factors. That could mean the general cooling trend continues, and reducing the odds of that final rate hike by the Fed.

Average hourly earnings are expected to moderate a bit to 4.1%, down from 4.3%. That would still be above the (slowly creeping higher) inflation rate, and contribute to expectations that US consumers could remain resilient going into the end of the year.

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