So far this year, analysts have overestimated NFP results pretty much every time. If that were to happen again this time, it could end up convincing a lot of traders that the Fed will hike at the next meeting. With all the uncertainty around the debt ceiling issue still in play, the scene is set for a potentially volatile NFP reading.
After the last Fed meeting, there was a pretty strong consensus that there would be a pause when the FOMC gathered again in June. It was generally understood that the rate decision statement was effectively saying that. But after parsing the Fed minutes and the latest developments with prices, now the majority of traders are expecting a hike. Tomorrow’s jobs data could incline the balance, and shift the dollar substantially.
Where things are going
Just over two thirds of traders are expecting a rate hike at the next meeting, a substantial increase since just last week when the majority still expected a pause. One of the intervening factors was politicians reaching a deal on the debt ceiling, which helped return some optimism. But the debt deal also implies a substantially increased amount of spending from the government, bringing inflation concerns back to the fore.
The labor market has become increasingly a focus for the Fed, as well. That’s because as inflation comes down, it’s approaching the level that salaries have been increasing. When the CPI change was up in the 8% range, average hourly earnings of ~4% were a secondary concern. But when inflation is getting down to the 4% range, then this strong growth in salaries could be a strong impediment to bring inflation back to the 2% target.
What the projections are
Average hourly earnings are expected to once again grow at 4.4%. In the context of a labor force participation rate that is expected to fall to 62.5% from 62.6%, this raises the issue of tightness in the jobs market. A strong jobs creation number could be seen as a sign that inflationary pressures have become ‘second order’.
That’s something that central banks are worried about because it means that inflation has become structural, and it needs more policy action to bring into line. So far, the Fed has insisted that’s not the case. But a “hot” labor market with constant increases in wages would be seen as increasing production costs and demand, driving prices higher. Getting the unemployment rate back above structural level might become a new priority for the Fed, which would increase bets for higher rates.
What the numbers say
The unemployment rate is expected to tick back up to 3.5% from 3.4% prior, just barely lifting off from pairing historic lows. That is still seen as well below structural level, and contributing to higher labor costs.
The headline NFP number is once again expected to come in at 180K, down from the 235K reported last month (when analysts had also expected a growth of 180K). The expectation is that if it’s reported that over 200K jobs were created, then the consensus for a Fed rate hike at the next meeting could consolidate. But a miss might shift the consensus back to where it was a few days ago, expecting a pause.