Non-Farm Payrolls preview: all about the money – 3

The May 2017 Non-Farm Payrolls report is critical for the June decision. If the Federal Reserve is truly data dependent, this is the most important data point. The Non-Farm Payrolls, aka NFP, or “king  of forex indicators” is coming on the first Friday of the month, and wages matter a lot more than the actual job gains.

According to Fed officials, the bar is high for not raising rates in June. They might opt for hiking now but totally halting rate hikes for the year if the economy continues to wobble. On the other hand, a convincing rise in wages could cement the rate hike.

Why are wages so important?

Wages are important because  their rise  is related to  a heating economy that needs to be cooled down by the Fed.  Salaries rise when employers find it hard to find employees. They need to raise their offers to tempt workers. When workers have more money in their pockets, they spend more and not on essentials such as food or energy. This, in turn, pushes core inflation higher, and that’s when the Fed notices.

So far, core inflation is going in the wrong direction, but a rise in average hourly earnings implies higher core inflation in the future.

What about job gains? 186K is where expectations stand. The headline number will likely shape the initial reaction. Over 200K could result in a stronger dollar while a miss of under 150K could hurt the greenback.

The initial reaction is not necessarily the right one

This is the key: wages tend to have the upper hand, but not at the first moment.

3 scenarios

1. Wages are at 2.5% or lower: An ongoing grind at 2.5% or a slowdown in wage growth could totally derail the Fed from raising rates in June. The minimum is that they are trapped in their guidance to markets regarding June, but will  turn the move into a “dovish hike”. This means raising rates in June but lowering the dot plot for the rest of the year. A “one and done” if you wish.
2. Wages are 2.8% or higher: Reaching the cycle highs or even reaching the holy grail of 3% would be a blockbuster report. Rising wages  reflect a rapidly growing economy that needs cooling down with rate hikes from the Fed.
3. Somewhere in the middle: At 2.6% or 2.7%,  speculation will be rife. A “not too hot, not too cold” scenario could  cause a lot of confusion and choppy trading. The  so-called “verdict” regarding the hike and the type of the hike could wait for Monday. By then, analysts will have already had a bias, but for trading the NFP, it implies a lot of mess.

More:  USD: 5 Reasons Why USD Bulls Need To Be Patient & Selective – BofAML