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Non-Farm Payroll look-ahead

By David Morrison  |  05/04/2018 13:48

A look at what to expect from tomorrow’s important data release

Tomorrow sees the latest update for arguably the most important, and potentially market-moving, global data release – US Non-Farm Payrolls. But given the current low rate of unemployment (which is expected to fall to a fresh 17-year low of 4.0% for March), market participants will once again focus on Average Hourly Earnings for any signs of a pick-up in wage growth. Previously this has fed straight through to inflation expectations, raising concerns that the Federal Reserve may raise their anticipated pace of monetary tightening. This was particularly evident in early February when Average Hourly Earnings jumped to an 8-year high of 2.9% year-on-year, coming in alongside a better-than-expected payroll report. The news helped trigger a spike in bond yields and volatility, catalysing the biggest sell-off in global equities in two years. But last month Average Hourly Earnings dropped back sharply while payrolls soared. This saw equities rally, topping off a post-corrective bounce which has since faded.

Volatility elevated

Tomorrow’s update comes amid the sharpest and most protracted sell-off in equities since early 2016. This was when a second clumsy Chinese currency devaluation in less than six months rocked financial markets leading to a corrective pull-back of over 10% in the major US stock indices in the space of six weeks. Today we see stock market volatility heading back up to “normal” levels – at least when compared to the last few years. We’re also seeing large swings in bond yields as investors dump US Treasuries on inflation fears only to pile back in again as a sanctuary from tumbling equities. Investors are having to adjust to a dramatic shift in market sentiment since early February. The “buy the dip” strategy which has worked so well over the last few years seems in danger of morphing to “sell the rallies”. This comes as the euphoria of Trump’s tax cuts and spending plans has evaporated to be replaced by fears of growing budget deficits, the possible imposition of trade tariffs, a dysfunctional White House, troubles with the giant tech corporations, an expensive stock market and a withdrawal of monetary stimulus by the Federal Reserve.

Scope for a surprise

Some of these concerns ebbed yesterday after St Louis Fed President James Bullard said there should be no further rate hikes in 2018. Then Larry Kudlow, Trump’s new chief economic advisor, said that markets shouldn't overreact to trade tensions, as Trump’s China tariffs are currently just proposals. On top of this, stock market bulls are looking forward to a strong first quarter earnings season which kicks off next week, although given the tough year-on-year comparisons, there’s scope for disappointment. Given this backdrop many analysts are saying that tomorrow’s data is of little importance. However, there’s plenty of scope for another surprise.

Focus on wage growth

Analysts are looking for March Non-Farms to come in around 190,000. This would keep the six-month average around 186,000 which is very healthy with unemployment at 4.1%. Average Hourly Earnings are expected to rise 2.7% year-on-year, representing a modest pick-up from February’s 2.6%. But if this spikes up to 2.8/2.9% and payrolls are strong, then investors will once again factor in a pick-up in the pace of rate hikes from the Fed. The dollar should spike higher, sending the Dollar Index further above resistance around the 90.00 level. We may see an initial rally in stock indices, but the danger is that this fades as investors once again focus on tighter monetary policy from the Federal Reserve.

Investors still nervous
So, bulls will be hoping that wage growth is benign, staying around 2.6%. This should help to calm markets and give asset prices a lift. But it may not be enough on its own to cancel out all investor concerns.
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