Discourse in the markets seems to be dominated of late by tariff concerns and their economic impact. But the key data coming out on Friday might be an opportunity for traders to refocus on fundamentals. After the Fed’s “hawkish” hold last week, US January NFP ( Non Farm Payrolls) could justify the market’s shift or cause a reversal.
The thing is, economic data – particularly related to the jobs market – has been providing mixed signals. The consensus behind the expectation that the Fed won’t move on rates until June (instead of possibly as early as March as previously thought) is that inflation will remain elevated. That’s partially thanks to an expected faster growing economy and a tighter labor market.
The Confusing Indicators
But Q4 GDP was less than expected, and howed a slowdown from prior quarters. In contrast, the faster data from PMI was better than expected. On Tuesday, the Bureau of Labor Statistics’ (BLS) JOLTS report showed a dramatic drop in the number of open jobs. Then on Wednesday, the private ADP measure of jobs showed that hiring picked up. All of this provides a confusing picture about whether or not the labor market is tight.
The drop in job openings and a rise in hiring is somewhat easier to explain: If companies hire people, then the jobs that were open will be filled. But that also means the growth in hiring is trending lower if businesses aren’t putting out more job offers. This is important to measure the inflation trend, as abundant jobs means workers can demand higher wages, pushing up average incomes, labor costs and demand for products and services.
The Policy Impacts
Trump is also targeting removals of illegal migrants and heavily discouraging arrivals. Research suggests that as much as two-thirds of hiring over the last quarter was taken up by foreign workers (both legal and undocumented). Add to that the Trump Administration’s push for pro-business policies, the labor situation could be even tighter, and reflected in the upcoming NFP data. If there are fewer migrants to hire, and migrants made up the majority of new hires, then the number of new job creations might suffer even if there is still strong demand among employers.
These “quirks” in the labor market could cause results that surprise markets, and generate a stronger reaction in forex prices. A miss in the numbers might be immediately interpreted as a sign that more easing is coming, but that move could fade quickly depending on the reasons for the miss. The same with a major beat, particularly if the unemployment and earnings numbers don’t match up.
What To Look Out For
The consensus is that US January NFP will come in at 205K jobs added, a slow down from the 256K added in December. However, that’s well within the range that would normally be considered a “robust” number. Meanwhile, the unemployment rate is expected to remain unchanged at 4.1%. As is average hourly earnings, expected to show an annual growth rate of 3.9%, staying above inflation.
The thing is that significantly higher than expected NFP would imply more inflation pressure, keeping the Fed from hiking soon. On the other hand, a significant miss might bring back the expectation that the Fed will cut as soon as the next meeting, and weakening the dollar.
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