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October NFP: Last Push for a Rate Hike?

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US jobs numbers are now in focus as investors try to figure out if the Fed has gone too far with the rate hikes. With core inflation continuing lower and the strong GDP growth, there is a certain amount of uncertainty about where the economy will go. And with that, the trajectory of the dollar.

Higher consumer spending has kept the economy afloat, but in order to be sustainable, wages have to keep up. But, if wages grow too fast, then that keeps inflation pressures. With a still tight labor market, the Fed might still be inclined to keep tightening to ease up some of the price pressures. On the other hand, too much tightening, and the economy could tip over into a recession. While that will bring down inflation, it will also likely pull down the dollar.

What the Data Says

Last month, the market was caught by surprise with a jobs number that beat all expectations. That was after the number of job openings unexpectedly increased, as more people joined the labor force. There have been instances of outlier months in the past, and the market seems to be taking that view. Additionally, prior months have typically been revised lower this year, which could reduce the impact further.

The consensus this time around is for there to have been 190K Non Farm Payrolls added last month, well below the 336K reported for September. This is seen as returning to a “normal” range for the figure, and therefore the unemployment rate is expected to be unchanged at 3.8%. Where the focus will likely be is on average hourly earnings, which are expected to maintain an annual growth rate of 4.2%. That is well above the 2.0% inflation target of the Fed, and could signal that the labor market is still too tight.

Potential Market Reaction

Coming so close after the latest FOMC meeting, the immediate effect of the NFP could be a little reduced. Also, there will be another bout of jobs data before the next Fed meeting as well. Investors might be looking forward to the CPI data coming out next week, which could have a bigger impact on the market. We should also remember that last time, there was an increase in the number of job vacancies prior to the surprise NFP. This time around, JOLTS reported that the number of open jobs had hardly changed over the prior month.

Therefore, it might need a bit of a bigger beat or miss to shake up the market. There are a lot of moving parts, so it might be up to a combination of factors that could push the market reaction, and not just the headline number. Rising unemployment could be seen as a sign of labor market loosening, and hurt the dollar. And a large NFP print could be offset by a large revision to the prior month.

The Future for the Greenback

The dollar index has been gaining a bit of traction over the last couple of weeks as the yield curve has been moving higher once more. Investors are still wary of rising debt costs even if the Fed turns its rate hiking pause into a permanent thing. This could keep supporting the dollar, especially if the economy remains resilient.

A sudden decrease in job creation, or rise in the unemployment rate, could be a sign that the economy is on shaky ground. If a recession does happen, it would imply that the Treasury would have less revenue in the future, and would have to borrow even more. That could also support the dollar, as yields rise and inflation decreases. For now, a “soft landing” might be the scenario that could end up hurting the greenback the most.

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