The US nonfarm payrolls are due on Friday and the consensus is that the US economy has added a balanced 195’000 nonfarm jobs over the last month versus a sub-standard performance of 151,000 in January. Given the gloomy start to the year, the below-average expectation is perfectly reasonable. According to Markit’s PMI survey, the US services sector contracted for the first time since October 2013. The slight recovery in manufacturing was clearly not enough to fill the gap. From an overall perspective, the composite index is just at 50.
The cheap oil prices and the fierce battle among the oil producers have led to a 6th week of contraction in US oil production as we approach the FOMC’s March meeting. The slowing global economy, the inability to generate inflation in major developed economies, the volatility in the financial markets and the highly tense investors could have started to impact the US growth dynamics, where the momentum in wages growth had just picked up to an enthusiastic level. This enthusiasm had accompanied the Fed in its first step to the policy normalisation on December 2015.
The fact is that the US labour market improved significantly. The unemployment rate steadily decreased from 10% end-2009 to 4.9% in January and the US economy absorbed 222,000 jobs on average over the past twelve months. These are good news; nevertheless investors are increasingly willing to see a better performance in terms of the quality of jobs added rather than the quantity only. Besides the nonfarm payrolls and the unemployment rate, the improvement in wages and the participation rate should be closely watched because the pay is undoubtedly a major indicator of inflation and inflation expectations. The earnings are expected to have grown by 0.2% on month, slower than 0.5% recorded on January.
When the Fed decided to kick-off with the monetary policy normalisation on December 2015, the market anticipated an additional 1% rise in Federal funds rate to follow through 2016. This scenario implied that the second Fed hike would happen by March 2016.
Unfortunately, the New Year did not bring joy and happiness to the market, at least not so far. The slowdown in China, sharp sell-off in equities, cheaper oil and commodity prices, depressed and compressed investor sentiment and the political vows before the US presidential elections are now piling up. As a result, the market gives less than 10% probability for a March rate hike.
A read above 150’000 could temper concerns that the global slowdown may be spilling over the US jobs market and improve the Fed expectations for the year. While we do not believe that a rate hike is on the table for the March FOMC meeting, a read exceeding the 200’000 psychological mark could well bring some Fed hawks back to the market and bring the market to price in a one or two rate hikes before the end of this year, if the earnings growth has at least been in line with 0.2%m/m expected.
A soft read will certainly further develop the fear that the Fed will not be at a position to carry on with the normalisation. In this case, the December hike will be increasingly considered as a‘one-and-done’ scenario. The US yield curve will then be susceptible for further flattening pressuring the dollar downwards.