Non-farm payrolls look ahead

US job numbers take centre stage on Friday, and as usual the figure will play a part in Federal Reserve policy expectations.

US flag
Source: Bloomberg

Recent data from the US has been getting steadily worse. The latest ADP report came in above expectations, at 205,000, but was still down from the 264,000 jobs created in December. More worryingly, service PMI numbers have been dire, with the employment sub-index being a particularly weak component.

In addition, durable goods orders were down 5% over the month, while Q4 GDP numbers showed growth of just 0.7% for the annualised quarter-on-quarter figure, down from 2% for Q3.

As a result, the Fed is now expected to hold rates at their current level for the year, with market expectations of ‘no move’ (the ‘one and done’ scenario) now greater than for rate increases in the four quarters of the year.

Non-farm numbers this week will still carry their usual importance to the tone of the general session, but it is the broader global situation that should carry greater weight with the US central bank. An ongoing rout in commodity prices, plus a steady flow of capital from emerging markets to the US, as well as falling Chinese economic growth, means that the bigger picture is the one that concerns the Fed.

Expectations are for 190,000 jobs to have been added in the month, while the unemployment rate holds at 5%. At least average hourly earnings are expected to be better, with growth of 0.3% month-on-month.

A fourth consecutive positive surprise could see the US dollar regain some ground, on revived expectations of a 2016 rate move, while any negative reading would likely push both the greenback and US stock markets lower, on the combined expectations of weaker economic growth and a further scaling back of rate hike expectations.

With stock markets flatlining in December, and the mid-week rally having lost much of its momentum, the risk now is primarily to the downside, with a move below 16,000 for the Dow Jones in prospect and further declines in the direction of the January low looking a distinct possibility. 

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