What To Expect From NFP Report After Powell’s Remarks

This Friday’s NFP report for August comes one week after remarks by Fed’s Jerome Powell, in his speech before Jackson Hole symposium, opening the door for important questions, including but not limited to: how much the jobs data will convince Fed’s policymakers of a certain QT course.

NFP data has usually an impact on expectations for monetary policy, since it is the preferred employment measure for the Fed. However, several FOMC members have implied that an increase in unemployment would be acceptable to bring inflation down. In fact, in Powell’s Jackson Hole speech, the “pain” comment included the expectation of higher unemployment.

Markets cannot ignore any significant moves in employment statistics because of the fact that any significant surge in unemployment or payroll weakness is sufficient to trigger risk-off sentiment across financial markets. Any signs of economic slowdown could hurt the overall market sentiment given the Fed’s obvious preparedness to continue rate hiking to curb inflationary pressures.

The reaction of markets in response to the NFP data could dominate news headlines over the following weekend. Markets are keeping close eyes for the latest wage data as a signal for inflation levels. Given that Fed’s policymakers are specifically targeting inflation, any particularly significant move in wages could be contributing to future monetary policy.

The financial markets’ spotlight, on the first of September, is on the August’s US Non-Farm payrolls data. Most expectations suggest a hiring slowdown in the US from July’s pace pf 528,000 to a still robust 300,000 jobs during August.

It is often useful to look out for clues within alternate employment readings, with the Automatic data processing (ADP), Conference board survey, jobless claims, and Institute for Supply Management (ISM) purchasing managers index (PMI) survey all worth analyzing ahead of the main event.

The headline non-farm payrolls figure is expected to fall back after a surprise July’s generous figure of 528,000; the highest figure in five months, breaking the falling trend of payrolls over that period.

Looking at the unemployment rate, markets are expecting the rate to stay at 3.5% following a surprise decline in July’s data. US wages will be a key element for traders, with inflationary fears driving the selloff in risk-related assets this week. While inflation has been higher, central banks will hope that employers do not drive forward cost-push inflation by impacting wages and, in turn, passing related costs on to the consumer.

The Dollar Index is pushing through the July peak of 109.02 once again today. There is a good chance this set markets into the next highs for the American currency, with expectations of further Fed tightening and haven demand bringing support for the dollar. A break below the 107.27 level would be required to negate that bullish outlook.

Last month, markets were caught by surprise when the BLS reported that NFP had grown by over half a million. But over 300,000 of those jobs came from the birth-death adjustment. It’s unlikely the adjustment will be as large this time around, but that doesn’t mean that markets won’t be once again caught off guard.

So, a deteriorating employment situation is unlikely to dissuade the Fed from policy hiking. On the other hand, the markets are pretty much pricing in a 75bps hike at the next meeting. This is why another beat will simply confirm what is already expected about further tightening.