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NFP Preview: How Will Job Numbers Affect the Fed's Next Rate Hike?

NFP Preview: How Will Job Numbers Affect the Fed’s Next Rate Hike?

The US dollar remained below the 102 mark on Friday, ahead of the non-farm payrolls report later on day. NFP preview indicate that US labor market is starting to feel the burden of tighter lending conditions and challenges facing local businesses.

The greenback have fallen to a 2-month low earlier in the week on the backdrop of weak data that spurred fears of slowing US economy. 

Recent data showed that private US companies created fewer jobs than anticipated in March, resulting in job openings dropping below 10 million for the first time since 2021. Additionally, factory orders continued to decrease, and the ISM Manufacturing PMI indicated a fifth consecutive month of decline.

Markets are stuck in thin trading due to Good Friday holiday in major economies.

NFP Preview – Labor Market losses steam

Friday’s US jobs figures and the CPI report for April 12th are key indicators to look out for in assessing Fed’s short-term policy outlook.

Outlook for job gains is uncertain given the recent uptick in job lay-offs and continued policy tightening . Tighter lending conditions along with banking uncertainty remain major headwinds to US businesses and may reflect more on data for the following months. 

Market participants anticipate slower job gains in March. The US economy is expected to add 228K jobs, lower than 311K jobs recorded in February. Unemployment is anticipated to stabilize at 3.6% for the second consecutive month, staying near 50-year low of 3.4% printed in January.

If March job growth steadied between 200K and 300K, there is a high chance that expectations for a 25 basis point rate hike in May will increase. 

Labor market figures to consider:

  • The employment component of the ISM Manufacturing PMI fell to 46.9 in March from 49.1 in February.
  • Employment in the service sector also decreased from 54.0 to 51.3, according to ISM Services PMI.  
  • Jobs in the private sector disappointed market expectations by adding only 145,000 jobs in February, well below expectations at 208K and February’s upwardly revised reading of 216K. 
  • The 4-week average of jobless claims hit its the highest levels since November 2021 at 1,804,000, an increase of 10,500 from the the previous week’s adjusted average.
  • In March, American companies reported 89,703 job cuts, which is a 15% increase from the 77,770 reported in February. It’s also a significant increase of 319% from March of 2022. In the first quarter, the number of job cuts was 396% up at 270,416 compared to the same period the previous year, marking the highest quarterly increase in lay-offs since 2020.

How Will Data Affect Fed’s Policy?

There’s a split on whether the Federal Reserve will increase interest rates at its next monetary policy meeting on May 3. So far, Fed policymakers have been avoiding direct commentary on future moves, probably they’re waiting for more data and assessing the impact of the recent banking sector crisis on financial stability to make up their mind.

According to CME’s FedWatch tool, expectations for the Fed’s next rate hike is constantly changing. Just one month ago, markets were pricing a quarter basis point rate hike by 61% while nearly 35.5% expected a 50 bps hike. Even there was a chance of a bigger rate hike. 

NFP Preview,US Dollar,Fed Market Analysis

Currently, the options are limited; either a 25 bps hike or no rate hike at all. 

The upcoming NFP report will be a main driver for US rate hike expectations as well as the greenback. Better-than-expected data would trigger fresh buying interest for the US Dollar. A tight labor market will allow more space for the Fed to comfortably raise interest rate in order to bring inflation back towards target. 

Inflation data, measured by the Consumer Price Index (CPI), will be released on April 12 and will offer more clues on how successful the Fed’s tightening efforts are in taming inflationary pressures. 

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