NFP Preview US jobs report likely a mere formality before March rate hike

The US jobs report for February is set to be released on Friday morning, just a few days before the Federal Open Market Committee (FOMC) meets and announces its interest rate decision next Wednesday. Unlike previous jobs reports, this Friday’s non-farm payrolls (NFP) data should serve as little more than a mere formality before the Fed very likely institutes its first rate hike of 2017 next week. That is, of course, unless the jobs data comes out to be disastrous, which is highly improbable given the positive readings from other recent employment indicators.

In recent weeks, Fed officials have delivered a coordinated message signaling a renewed hawkish stance ahead of the mid-March FOMC meeting. Hawkish remarks have come from several key Fed members, including Fed Chair Janet Yellen, and have helped dramatically boost expectations of an impending rate hike. Much of this renewed stance can be attributed to economic growth optimism along with corresponding anticipation of higher inflation and increased employment under the Trump Administration.

As a result of this wave of hawkish sentiment from the Fed, the primary hurdle ahead of a Fed rate hike next week with respect to jobs has been set rather low. It has been suggested based on comments from Fed officials that even a number falling well short of expectations would be sufficient to constitute steady employment growth and warrant a Fed rate hike next week. Judging by other recently released employment indicators, especially Wednesday’s ADP private sector employment report, Friday’s jobs data is likely to far exceed that low Fed hurdle.

In the run-up to Friday’s jobs data and next week’s Fed decision, some markets have been showing marked anticipation of higher interest rates. Most notably, the US dollar has remained well-supported in an uptrend since early February, while non-yielding gold has slid sharply since late February. In the event that Friday’s NFP data is either better or in-line with expectations – or even modestly lower than expected – a March rate hike should be further reinforced and the current market dynamics with respect to the US dollar and gold could very well be extended.

Last month’s NFP data showed 227,000 jobs added for January, far exceeding previous forecasts of 170,000. This month could be similar or better if the noted ADP report released on Wednesday is any indication. ADP reported a stellar 298,000 US private-sector jobs added in February, the highest increase since April 2014 and far higher than the ~185,000 expected. While the ADP report is not necessarily a very accurate predictor of the official NFP data, it is certainly an indication of significant improvement in the overall employment picture during the Trump Administration’s first full month in office.

NFP Expectations

Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are currently around 185,000 jobs added for the month of February (though some have raised forecasts since the ADP report). The January unemployment rate is expected to come in at 4.7%, while average hourly earnings are expected to have increased by 0.3%.

Aside from the stellar ADP report, other key employment-related data releases for February include the ISM manufacturing and non-manufacturing PMI employment components, along with weekly jobless claims data throughout the month.

ISM manufacturing employment in February continued to show growth and expansion at 54.2, albeit at a slightly slower pace than in January. The more critical ISM non-manufacturing (services) employment showed even faster growth at 55.2 in February than the previous month.

Finally, February’s weekly jobless claims data has generally been positive, with only one week in the month failing to beat expectations. Overall, the number of unemployment claims in February remained near decades-long lows.

Forecast and Potential Market Reaction

Overall, the trend of solid employment data is likely to have continued from previous months into February. The actual number is even likely to be significantly higher than expected, if the extremely positive ADP data is to serve as any guide. With prior consensus expectations of around 185,000 jobs added in February, our target range is around 200,000-225,000, given the sheer magnitude of upside deviation found in the ADP data. As noted earlier, the bar for a March Fed rate hike has been set low, so even if the actual jobs data falls somewhat below consensus estimates, it should not likely affect the dollar or gold in any major way. The greatest risk is of a large downside deviation – under 100,000 or so – but this, as mentioned, is highly improbable. As long as the number comes out above 150,000, the dollar should continue to be well-supported while gold should remain pressured.

NFP Jobs Created and Potential USD Reaction

> 225,000
Bullish

201,000-225,000
Moderately Bullish

185,000-200,000
Neutral

150,000-184,000
Slightly Bearish

< 150,000
Bearish