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Forex: Will Another Strong NFP Embolden the FED?

Posted by Akhilesh Ganti on Apr 6, 2017 12:00:00 AM
  • Current month preview (click to enlarge)
The US Labor Department will release the March 2017 employment data on Friday April 07, 2017 at 12:30 UTC. Forecasts are that the US economy added another +180k jobs in March, which is lower than the 12 month EMA at +203k, as both private and manufacturing hiring are expected to revert to norm. Considering the recent blockbuster prints, this appears to be a bit on the conservative side (see chart) (click to enlarge) but is still quite consistent with an ever-tightening labor market that would reinforce the narrative of a strengthening economy.
The unemployment (U3) and the participation rates are forecast to remain steady at 4.7% and 63% respectively. The markets will also be eyeing the average hourly earnings which is predicted to rise to 0.2% m/m. The underemployment rate (U6), a FED favorite in gauging labor market slackshould continue its downward trajectory back to levels not seen since BEFORE the great recession. (click to enlarge)
  • Last month review

Non-farm payrolls shattered expectations again posting robust gains of +235k in February aided greatly by strength in private and manufacturing sectors. The unemployment rate fell back to 4.7% even as labor force participation increased. Average hourly earnings rebounded to 0.2% m/m pushing annualized wage growth, after prior month upward revisions, back to 2.8%. This was a very strong report that depicted a labor market near full employment, solid consumer spending and economic expansion that would need a proactive FED. Apparently the august body agreed as they raised the FED FUNDS rate by 0.25% (range: 0.75% to 1.00%) on March 15, 2017.

  • Why is it relevant?

While the FOMC did act, hiking rates on the Ides of March, they did NOT signal an acceleration to the tightening process for the remainder of 2017 and beyond. The dot plot of rate projections, a guidepost of sorts to the committee's thinking, remained as is implying that the FOMC will lean dovish until there is more clarity and confidence in the current regimes competence. While the headline numbers will garner the most attention, the key might well lie in the "secondary" data namely earnings growth and participation rate figures. An economy at or near full employment should see the pace of wage growth surge which, in turn, should buoy consumer spending further. If there is evidence of this then the US dollar, which had a desultory first quarter after the Trump-inspired rally ran out of steam, could benefit and resume its upward trajectory. Conversely, a lack of follow through on the wage front could very well see the greenback confined to its recently defined ranges. (click to enlarge)

The FED cannot afford to be viewed as being "behind the curve" as that would greatly undermine their credibility. Another positive report trouncing expectations would surely intensify pressure to the point where they might not have a choice but to escalate monetary policy to neutral from its current "slightly accommodative" state even if the political landscape remains discombobulated.

Topics: DXY, Asian session, NFP


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