NFP Preview: What to Expect? Why do Investors Focus on Powell’s Speech?

The looming U.S. Non-Farm Payrolls (NFP) report on Friday has garnered a significant amount of attention, yet many analysts believe Federal Reserve Chair Jerome Powell’s subsequent speech will hold far greater sway over market sentiment.

In a climate fraught with trade tensions and evolving economic forecasts, investors are keenly focused on deciphering the Fed’s stance.

The crux of the matter lies in the potential inflationary impact of newly imposed tariffs. Concerns are mounting that sustained tariffs could push U.S. inflation to a staggering 5% this year. This scenario resurrects the specter of “Team Temporary,” a phrase that has become a blemish on Powell’s legacy, as policymakers grapple with distinguishing between transient shocks and persistent inflationary pressures.

The Fed finds itself in a precarious position. Market expectations have firmly priced in a rate cut on June 18th, with a high probability of another in July. Over the next year, the market anticipates a cumulative 109 basis points of easing. However, recent Fed commentary suggests a shift towards a more hawkish tone, casting doubt on the likelihood of such aggressive rate cuts.

Several Fed officials have voiced concerns regarding inflation risks stemming from tariffs. They have all emphasized the potential for prolonged inflationary effects, cautioning against underestimating the long-term impact of trade policies. This unified message, emerging since the last FOMC decision, signals a potential divergence between market expectations and Fed policy.

Amidst this backdrop, the NFP report for March takes on a supporting role. A reading between 100,000 and 200,000 would align with a soft landing narrative, potentially bolstering market confidence. However, a figure below 100,000 could trigger renewed market volatility and potentially prompt fiscal interventions, such as tax cuts.

However, the NFP report, being a reflection of past economic activity, might not be the primary market driver. The market, as a forward-looking mechanism, is more concerned with future expectations. As seasoned traders emphasize, focusing on the next 6-12 months is crucial. Events and data that alter these expectations trigger market adjustments.

For example, the Fed’s 50 basis point rate cut in September shifted expectations towards a pickup in economic activity, leading to a dollar rally and bond sell-off. Similarly, trade war anxieties in the first quarter of the year dampened growth expectations, influencing market behavior.

Therefore, the NFP report should be viewed within the context of prevailing market expectations. A positive outcome amidst tariff concerns might be discounted, while a negative report could amplify bearish sentiment. Conversely, if tariff concerns ease, a weak NFP might be overlooked.
Morgan Stanley’s forecast anticipates a cooling in U.S. job growth for March, with payroll gains softening and government layoffs beginning. Their projections include:

• Payrolls: 130,000, down from February’s 151,000.
• Government jobs: Slowing federal hiring and increasing layoffs.
• Private sector: Modest gains, with a slight boost from returning strikers.
• Wages: A 0.3% month-on-month increase in average hourly earnings.
• Unemployment rate: Steady at 4.1%.

Morgan Stanley’s analysis points to growing labour market fragility. Unless the NFP report significantly surpasses expectations, market concerns about an economic slowdown are likely to persist.

While the NFP report will provide a snapshot of the current labour market, Powell’s speech will likely be the dominant market catalyst. Traders should focus on the Fed’s rhetoric and its potential impact on future expectations, rather than solely reacting to the backward-looking NFP data. Understanding the interplay between economic data, Fed policy, and market sentiment is paramount in navigating the current environment of heightened uncertainty.