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US March NFP: More Reason to Delay the Rate Cut?

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Markets are looking forward to Friday’s barrage of labor statistics from the US, including the US March NFP, with a certain amount of trepidation. That’s because economic data coming out so far this week has generally pointed to a more resilient economy. While Fed speakers over the last few days have largely maintained the same stance as before, there could be a chance the data might change the view for when easing will start.

Markets are pricing in a 62% chance of a rate cut at the June meeting, which is down slightly from the 64% chance seen before the start of the extended holiday weekend. That’s after a series of positive economic data that pushed up the dollar through the early part of the week. Among those data points was ISM Manufacturing, which popped back into expansion, and surprised the market.

No Cracks in the Labor Market

But, what’s more relevant for figuring out what will happen tomorrow was the release of the JOLTS report for February. That showed that the number of job openings in the US saw a modest increase. There was little change in the quits ratio, which is seen as a sign that the labor conditions have largely remained unchanged.That’s a problem for expecting interest rates to go down, because Fed members have said repeatedly since the start of the year that the labor market is too strong. Inflation pressure is being driven by wage growth, which is maintaining strong consumer demand. This overall picture of a strong labor market was reinforced on Wednesday when the ADP unemployment report came out, showing more jobs added than expected.

What the Data Could Say

Of course the ADP at this point has lost its reputation for being able to predict what the March NFP will show. Nevertheless, there appears to be a market shift towards expecting a beat, as has happened every time so far this year. March NFP is expected to come in at 200K, down from the 275K reported last time. We should recall that last time was also a beat, but often the prior month is revised lower. The unemployment rate is expected to remain unchanged at 3.9%.

Where the focus is likely to be on is the impact of wages on inflation. For that reason, the expected 0.3% increase in average hourly earnings, compared to 0.1%, could be a concern for the outlook on the Fed. With wages rising faster than inflation and resilient consumer confidence, the expectation is that inflation pressures will remain in place. And if the US economy continues to remain positive, the Fed will be inclined to hold rates higher than the market is currently pricing in.

Is There Any Good News?

The stronger dollar has come with the stock market struggling. But Wednesday’s ADP offered a ray of light for hopes of easing that could keep equities, gold and commodities on the upside. The services sector was seeing slowing activity in hiring.

That came in the wake of ISM services data showing that the prices paid component fell to the lowest level in four years. The Fed has been particularly concerned about the strength of the US services sector and its impact on inflation. If the service sector shows continued weakness in the NPF, it could lead to the dollar losing strength even if the headline numbers beat once again.

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