Markets seem to be holding their breath ahead of key September NFP data expected on Friday. There have been a lot of events in the world this week to push markets around. But the focus seems to still be on a combination of whether the economy is resilient, and if so, how much easing will the Fed manage.
A couple of weeks ago, Fed Chair Jerome Powell all but said the Fed’s rate trajectory is tied in with how the labor market is performing. He said the FOMC would have probably cut rates back in July if they’d had the labor data. Remember that in early August it was reported a massive drop in job creation in July that precipitated a large pullback in the markets. Things have stabilized since then, but job creation has been lackluster. Traders are rightfully worried that another surprise in the September NFP data could cause a big market move.
But Up or Down?
Markets have been readjusting their expectations for easing as well. By the end of last week, the consensus was there would be another double rate cut in November, and a high chance of a further “jumbo” cut in December to total 100bps of cuts. But those expectations have been paired back since Powell’s comments on Monday, the first time he addressed monetary policy since the latest Fed meeting.
We should remember that the consensus among members of the FOMC as measured in the “dot-plot matrix” suggested that there would be a 25bps rate cut at each of the remaining two meetings this year. That would total just 50bps. Powell essentially reaffirmed that in his Monday speech, saying that it wasn’t likely the Fed would repeat the large move that it used to start the easing cycle. Since then, markets have moved to generally price in just 25bps of cuts for November, giving interest rates (and therefore the dollar) some additional strength.
The Key Levels to Note
The dollar, and markets in general, are likely to react depending on whether the September NFP data suggests that there is further weakness in the US economy, or there has been a rebound in the jobs market. For that, there are a couple of key levels. A substantial miss of estimates would likely significantly hurt market sentiment.
Meanwhile, a number below around 200-220K would suggest the labor market is still weak, and below the replacement level. That would likely keep the Fed on a downward trajectory without causing a panic. A number above 225K would probably shock markets, and create worries that the Fed might pause its easing program as it would suggest that inflationary pressures are still there and the US economy was running hot.
What Are the Forecasts
The consensus among analysts is that the jobs creation rate will be only slightly lower in September than in August, continuing a theme of underperformance but not enough to set off alarm bells. The forecast is for 130K compared to 142K prior. The unemployment rate is expected to tick back to 4.3% as a result of rounding (it was lower last month because of rounding as well).
As for what could cause inflationary pressure, the consensus is for average hourly earnings to slow on a monthly basis to 0.2% from 0.4%. The annual growth rate of hourly wages is seen slipping to 3.7% from 3.8%, which would be consistent with a slowly falling inflation rate.
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