The release of December US Non-farm payrolls (NFP) on Friday is expected to show that the labor market remains resilient. But investors will be keen to look for any signs that the Fed might come under renewed pressure to ease. There is considerable uncertainty about when the FOMC will decide to ease, which is important for determining how strong the dollar will be in the short term.
For once, the market is agreeing with the Fed on the number of rate cuts this year. The central bank is expected to ease twice, but there is considerable disagreement on when. Markets are pretty convinced that there won’t be any move at the January meeting. But there is pretty much a 50-50 chance of easing in either the March or May meetings.
Moving the Currencies
With most central banks on an easing foot, what is important for how markets react is the timing. The sooner the rate cut is expected, the more the currency will likely weaken. So, if the data shows weakness in the US labor market, it could move expectations for easing to March. That would likely leave the dollar falling against its peers.
On the other hand, and unexpectedly strong reading in the Non-farm payrolls (NFP) would suggest that the Fed could wait until May (or even later) to ease. This would leave the dollar comparatively stronger. For comparison, the ECB is expected to ease four times this year, with three rate cuts in the first half of the year. If the Fed waits until May, it’s possible the ECB will have already eased 50bps by that point, widening the gap between the currencies, and pushing the EURUSD down.
What to Look Out For
The consensus among analysts is that Friday’s release of December Non Farm Payrolls will show the US added 200K jobs in December. While that’s a little lower than the 227K that was surprisingly high for November, it’s within the “normal” range to expect for a strong labor market. On top of that, a result around that number would be substantially higher than the average of the last six months.
Given the relatively high number, it’ll be harder to beat to the upside by a significant amount. What’s more likely is a miss, which could leave the market thinking the labor market is slowing down, and weaken the dollar. However, the market will likely want confirmation with a move in the jobless rate as well.
Keeping or Breaking the Trend
The consensus is that the unemployment rate will stay in line with the recent trend and be unchanged at 4.2%. But that needs to take into account the context, with the labor force participation rate also expected to be unchanged at 62.5%.
The recent JOLTS data showed that November saw essentially unchanged job openings and quit rate. Overall, that implies a resilient (albeit not growing) labor market. Investors will likely be on the lookout for signs of economic weakness, such as a rise in unemployment and in the participation rate. If people are seeing economic difficulties, they might rejoin the labor market. Those kinds of conditions would likely leave the Fed more inclined to ease in the coming months.
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