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US February NFP: A Return to Normal?

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There is a lot riding on tomorrow’s US February NFP report, as the labor market has become central for forecasts of where the Fed will go with rates this year. The dollar has been firming up the last few months as the market keeps pairing back hopes for rate cuts. Another strong labor market figure could exacerbate that trend; but if there is a surprise to the downside, the dollar could weaken.

At the start of the year, markets were pricing in at least six rate cuts this year, with the first being in March. Now that March has come around, markets have pared that back substantially, with a solid consensus only for four rate cuts, with the first starting in June. January’s surprisingly strong jobs figures factored substantially into that equation.

A Beat or a Revision?

The thing is, there is a pretty long history now of US February NFP numbers coming in well above market consensus, only to be revised lower the next month. The pandemic has distorted the way labor data is reported, along with the growth in the “gig economy”. So, it wouldn’t be at all surprising that last month’s outsized results were revised lower, and closer to what analysts had initially forecast. That could potentially offset any surprise gain in NFP this time around as well.

What the Fed is particularly concerned about is the rising wages, since that keeps consumer demand up and generates inflationary pressure. Over the last year, real wage growth has averaged around 1.2%. That means US workers are seeing their pay rise faster than inflation. On the one hand, this helps with keeping the economy growing. On the other, it means there is more upward pressure on prices. Both factors taken together mean the Fed is motivated to keep rates higher and has the room to do so.

What to Look Out For

US February NFP  are expected to come back into a more normal range at 195K, compared to the 353K reported in January which was above all expectations. That compares to a range of 180-200K in the pre-pandemic period of being the average. The average over the last 12 months has been 255K, but that could be revised if January’s extraordinary figure is adjusted as has become usual.

The unemployment rate is expected to remain unchanged at 3.7%, despite a slight increase in the participation rate. The focus for this indicator is on how “tight” the market is, and whether people are able to find jobs that offer higher pay.

What could move the market

But where markets are likely to put their focus is on the average hourly earnings figure. Last month, it came in at a blistering 0.6%, which was one of the key factors that inclined traders towards expecting the Fed to keep rates high for longer than initially anticipated. For February, that figure is expected to fall by a half to 0.3%.

That rate would still be above the Fed’s target, but might help alleviate some of the worries that rate cuts won’t happen for a really long time. The annual rate of average wage growth is expected to come down to 4.3% from 4.5% prior. This compares to the latest inflation report showing US CPI at 3.1%.

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