Right now, inflation is the main area of concern for the Fed, not so much employment or GDP growth. With that in mind, the wages aspect of today’s nonfarm payrolls report will probably be more important than the headline jobs growth itself.
The market is now pricing in more than a 70% chance of a rate hike in March, and three rate increases in total for 2022. Those odds were lower a week ago. This week, the FOMC’s December meeting minutes were released. In a bid to keep the US economy from overheating amid high inflation and near-full employment, policymakers warned of a “potentially faster pace of policy rate normalization,” according to the minutes of that meeting. This cause further pain for
tech stocks and
gold.
If wage inflation accelerates even more, this could further exacerbate price inflation. The Fed will thus be monitoring wage inflation ever so closely in the coming months.
So, what is expected?
Average hourly
earnings are expected to have risen a further
0.4% in December, although the year-over-year rate is expected to have fallen to
4.1% from 4.8% the previous month – owing to the impact of base effects.
In terms of the headline number, some
425K net new jobs are expected for December, up sharply from a disappointing 210K recorded in November. The unemployment rate is seen falling to a new post-pandemic low of 4.1% from 4.2% previously.
NFP leading indicators
The above expectations don’t seem too optimistic, judging by some of the pre-NFP leading indicators we have seen this week:
- ISM Manufacturing PMI Employment component 54.2 vs. 53.3 previously (positive)
- ISM Services PMI Employment component 54.9 vs. 56.5 last (negative)
- ADP Employment 807K vs. 505K last (positive)
- 4-week average of initial unemployment claims fell to 204.5K vs. 239K last month (positive)
If anything, we may even see a positive surprise for the headline NFP print this time. That’s not to say the market will necessarily respond in a meaningful way, because the attention will also be on the closely-watched average hourly earnings figure.
NFP trade ideas
How the markets might respond will depend on how strong or otherwise the actual report is going to be, both in terms of wages and headline jobs number. Investors will be taking both into account, possibly putting more emphasis on wages this time.
- If wages rise by more than 0.4% on the month, and with NFP at least matching expectations, then we would favour looking for long dollar trades against the yen. The USD/JPY has already broken to a five-year high and we could well see more gains as the monetary policy divergence between the US and Japan grows larger.
- If the jobs report is deemed to be around expectations, then we would like to the appeal of value stocks.
- If the employment report is deemed to be very bad, then long trades on gold and Nasdaq (or tech stocks) would make sense. We would also like the look of the GBP/USD, given the pound’s relative strength of late.
Source: ThinkMarkets and TradingView.com
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