In the wake of the Fed’s rate decision yesterday, there is a new focus on the upcoming jobs numbers that could be pivotal for the market’s expectations for the rest of the month. The dollar’s trajectory hangs in the balance as the Fed could be the last of the major central banks to get around to easing. If it does it at all this year, a possibility that Fed Chair Jerome Powell pointed out was still possible.
The US jobs market is expected to have weakened for another month, which would contribute to solidifying the outlook for interest rates. But, there has been a history of surprises with the labor data. And Powell’s comments also left the door open for a potential reassessment if the jobs numbers don’t match up with the right trajectory. That could end up giving the dollar a substantial boost.
Jobs in the Fed Context
The key takeaway from the FOMC meeting as far as the labor market is concerned were two comments from Powell. The first was that the risk has turned to the downside in terms of the Fed’s mandate. Basically, that means that the Fed no longer sees tightness in the jobs market as a major problem, and believes that the market is trending towards becoming loose. That means the inflationary effect of the jobs market is dissipating and the Fed could start worrying about the need to support the market in the future (AKA, more cuts).
But the other thing Powell said is that it was still possible that there wouldn’t be any rate cuts this year. How would that happen? Among other factors, if the jobs market was unexpectedly strong for the coming months. Which means if we get another surprise large build in NFP, or the unemployment rate suddenly goes down, the Fed is more than willing to hold rates for longer. That could significantly disrupt the market, as a September cut is fully priced in. Anything to suggest that there is a chance of waiting until October to start easing would likely support the dollar through higher interest rates.
What the Forecasts Say
The consensus among analysts is that the US added around 190K jobs in July, which would be only slightly lower than the 206K reported for June. That’s pretty much bang in the range that was “normal” for a growing economy prior to the pandemic. The addition of jobs means that employers are still confident in future performance, but also implies that there isn’t too much pressure on the market such that prices might be forced higher. A significantly lower NFP number could restart worries that the economy is slacking off, and create a rebound effect if people pile into the dollar looking for safety.
Meanwhile the unemployment rate is expected to remain steady at 4.1%. Again, this is relatively low, but off the lows of the post-pandemic period that was seen pushing wage inflation. A slight tick up in this reading could help markets feel more confident of more easing later in the year. That would also weaken the dollar, though not as much. Average hourly earnings are expected to also be unchanged at a monthly growth rate of 0.3%.
What could throw the markets for a loop would be if the unemployment rate were to move down again, especially if it were to go below 4.0%. Highly unlikely, but that could shock markets into moving rate cut expectations to October. A large build in the headline NFP number might not be so much of a shock if it doesn’t come with other signs of labor tightness, such as higher wages or lower unemployment.
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