The NFP report is expected to show that the US added 205,000 jobs in March, down from 242,000 in February. No change is expected for the unemployment rate, which is currently at 4.9%. Average hourly earnings are expected to rise by 0.2%, after declining by 0.1% in February.
Janet Yellen’s speech this week essentially signalled that US rates will remain on hold for the time being, with expectations of a move in April drastically cut back, and even June’s chances looking shaky.
Overall, it appears that the head of the world’s most powerful central bank is prepared to let unemployment move lower in the US, and (potentially) let inflation rise at a faster pace, if it means that the economic recovery becomes more secure.
Friday’s report will be viewed in that light. As has been the case for a year or more now, the actual headline number should not be the prime consideration, unless it diverges wildly from expectations (in either direction).
Instead, it is the wage number that we will concentrate on. Poorer wage growth points towards weaker inflation, which would indicate that monetary policy will remain accommodative for longer. A sudden spike in wage growth would likely boost the dollar, which would (ceteris paribus) suggest indices will go lower.
In FX markets, EUR/USD could see a significant turnaround if wage growth is strong. $1.14 has been the high-water mark so far this year, so dollar strength could put us on a path back towards $1.10, if not lower.
Weaker wage growth could see the upside case strengthen, with a daily close above $1.14 targeting first the October 2014 high at $1.1490, and then on to the August closing highs at $1.16.
USD/JPY has faltered this week, after rallying for a number of sessions. ¥114 still seems to be too much for the pair, so now we see if the trend back down to key support at ¥111 is back in action. A declining USD/JPY will hit Japanese exporters, which could lead to renewed weakness in the Nikkei 225.
In stock markets, the S&P 500 has enjoyed a remarkable rally off the lows of February, with gains continuing into March. However, it has fallen below its rising trendline, with an attempt to break back above it and push on towards 2080 failing.
If a rising dollar hits US indices, then we could see a move back to 2000, at least in the short-term, before strong seasonality in April and May (i.e. the historically good performance of the index in these two months) takes over.