A look ahead to Friday’s jobs report

Janet Yellen’s speech on Friday has essentially put the financial world on notice that Friday’s non-farm payrolls report could be the make-or-break moment for the cause of a US rate increase this week.

The speech raised the possibility of a rate hike this year, with the percentage chance (according to Bloomberg) rising to 36% for September and 61% for December. The strength we have seen in the dollar since Ms. Yellen spoke points towards a growing belief that tighter policy is on the way in the US, so it is possible December 2016 will see another rate increase just as its predecessor did last year.

Stanley Fischer, vice-chairman of the FOMC, provided his own fun on Friday with a warning that Friday’s job numbers would be the key point to watch. Normally it might be considered mad for a senior central banker to tie policy to one number, but Mr. Fischer’s economic pedigree speaks volumes, and so when he talks, the market listens.

Nonetheless, it would be foolhardy to suggest the Federal Reserve is about to shift to extreme hawkishness (in the context of global central bank policy) – indeed, the very tone of US monetary policy since 2009 has been to keep markets guessing. It would be entirely consistent with the Fed’s policy moves of late to hint broadly at a rate increase and then swerve away at the meeting itself.

Beware when looking at August – over the past five years, the August payrolls figure has missed expectations each time. A miss now would, paradoxically, be entirely consistent with recent trends and yet also prevent the Fed from hiking this year, if indeed it is putting as much weight on the number this week as comments have indicated.

Friday suggested a dovish Yellen had been broadly priced in, so her more hawkish tone (and those of others) rather caught markets on the hope. USD longs actually fell last week, so the broader market is not overly long-USD. Indeed, it may be, when viewed in the round, actually be short USD and treasuries, providing plenty of fuel for a dollar rally into Q4.

Current expectations are for a reading of 180K for the August report, down from July’s monster 250K, while the unemployment rate is forecast to drop to 4.8% from 4.9%. Average hourly earnings are also a crucial number to watch, and this time round are expected to rise 0.2% month-on-month, down from 0.3% in July. 

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