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Jan US NFP: Making the Case for the Fed

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There is renewed attention on the upcoming NFP data release after the surprise move by the Fed on Wednesday. Though surprise really should be in quotes, since the FOMC essentially committed to doing what it said it would do all along. Fed Chair Jerome Powell’s more explicit ruling out of a rate hike for March was in line with projections he himself had made at the prior meeting.

It could be argued that his comments were more definitive than would be expected. But as talked about in the preview to the FOMC rate decision, the market is pricing in a very different view of rate hikes than the Fed this year. And, ultimately, it’s the Fed, not the market, that decides what happens with interest rates.

Where To Now?

The key elements from Powell’s comment about why there won’t be a rate hike in March (or maybe even after that) is that the FOMC is not convinced inflation has come down enough. Prior to the meeting, dovish analysts were saying that six-month measures of inflation were down below target. But that doesn’t offset recent rises in prices as it appears the US economy is likely to avoid a hard landing that would drag down inflation.

What could convince the FOMC? Well, what is arguing for keeping rates higher is upward pressure in wages. The Fed apparently estimates that the labor market is too “tight”. That means labor costs are increasing, which would put pressure on demand, and therefore prices. And that is likely the main point that could define the dollar’s (and US equities’) reaction to the data on Friday.

What About a Correction?

A disappointment in the NFP numbers could quickly bring back hopes that the Fed might have been a little too harsh in dismissing future rate hikes. It’s not uncommon for Powell to come out in the week after a rate decision to “clarify” some of his remarks in light of the market reaction.

Though it should be noted that the pullback in equities in the wake of the rate decision was compounded by a negative report from a US regional bank. That happened to coincide with the Fed bringing its emergency backstop for unrealized losses from treasures to an end, which was seen as a solution to the regional banking crisis last year. The market wasn’t happy with what the Fed did, but it also had plenty of other things to be unhappy about. Which means there might be less incentive for Powell to come out and “smooth” the waters later.

How Could the Market React?

January Non Farm Payrolls are expected to fall back to 175K from 216K prior. Meanwhile the unemployment rate is expected to remain unchanged at 3.7%. Results in line with expectations or showing a more resilient labor market would likely affirm the view that the rate cuts won’t be coming soon.

Where the chief focus is likely to be on is the average hourly earnings, which are expected to show an annual growth rate of 4.0%, down from 4.1% prior. That’s well above the inflation rate. A sudden increase in the unemployment rate, or an unexpected drop in average earnings, could be seen as evidence to convince the FOMC that the time for cutting is near.

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