The odds of a Fed rate hike later this month doubled to over 60% after Fed Chair Kevin Warsh came across as more hawkish than expected during his Jackson Hole speech on Friday. Those odds have held fairly steady as the market has turned its attention back to inflation and away from jobs. However, a shocking Non-Farm Payrolls report this Friday could refocus the market.
The dollar hasn’t gained much over the last week despite the shift in rate hike odds. In fact, the dollar basket is weaker than it was before Warsh gave his speech. The market could be looking beyond the rate hike and focusing on broader economic factors. That could determine how it reacts to the most market-moving data release of the month.
What Numbers Really Matter
The notable takeaway from Warsh’s speech is that he said the jobs market was strong, despite the July reading coming in negative. Instead of citing the total number of jobs, the Fed Chair pointed to the unemployment rate, which remained at 4.1%. He also argued that lower hiring numbers are expected in a full-employment economy because if everyone is working, they are not getting new jobs.
As far as the Fed’s policy outlook goes, the unemployment rate is likely to remain the most important indicator. However, the market hasn’t been moving much on the Fed’s policy outlook. A weaker or stronger economy could have a bigger impact on the dollar as it would affect long-term yields. Weaker-than-expected NFP figures could weaken the dollar even if tight labour market conditions keep the Fed on course for a hike.
What Is a “Good” NFP Number?
The market’s baseline for a good NFP number depends on more than whether the figure beats or misses expectations. The US labour market has changed over the last year, with more people retiring. This pushes down the “replacement rate” as the labour force shrinks.
The Trump Administration’s crackdown on immigration is also reducing the number of people available to take up jobs. This could weigh on the NFP number. The BLS survey simply asks how many people work at a company, not their immigration status. If immigrants leave, either because they were in the country illegally or had their work status revoked, the number of hires will go down.
The total US workforce has declined by 1.4 million over the last year due to lower migration and retirements. This means the economy can maintain full employment with a much lower hiring rate.
What the Market Is Looking For
The consensus among analysts is that August Non-Farm Payrolls will rise to 50K from -27K in the prior month. The unemployment rate is expected to remain unchanged at 4.1%.
However, revisions to prior months could prove just as important. The results of the last two months usually receive revisions, and the combined change can exceed the beat or miss in the current month’s reading.
A small change in the unemployment rate is unlikely to move the Fed. Instead, if NFP beats expectations and the prior month gets revised back into positive territory, this could support the September hike thesis and strengthen the dollar.
On the other hand, a miss combined with a further downward revision to the prior month could weigh on the dollar. It could also push the market back toward more even odds of a rate hike.
