NFP Preview Wage growth in focus as inflation expectations rise

Monthly employment data will take center stage on Friday morning as the US Department of Labor will report on the number of jobs added to the US economy in April, the unemployment rate, and key wage growth figures. Recently, wage growth has taken on increased importance given market concerns about rising inflation. Wednesday’s FOMC decision and statement revealed that although the Federal Reserve kept interest rates unchanged as widely expected, Fed officials saw inflation rising close to the central bank’s 2% target. While this might not result in a more aggressive pace of interest rate hikes than previously forecast, it confirms the solidity of the Fed’s monetary policy tightening path. Any continuation of overall strength in the US labor market will also help boost the prospects of higher interest rates ahead.

In the run-up to the jobs data release on Friday, the US dollar has broken out into a sharp rally for more than two weeks while equity markets have been heavily pressured. These market moves have been driven in part by increasing expectations of rising inflation and interest rates. A sharp drop in equity markets along with a large spike in market volatility back in early February were initially sparked by higher-than-expected wage growth data that boosted inflation worries.

Current NFP Expectations

The consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in April, after March’s disappointing 103,000. The April unemployment rate is expected to have fallen to a low of 4.0% from the 4.1% of the past several months. In terms of wage growth, average hourly earnings are expected to have increased by 0.2% after March’s 0.3% increase.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a mixed employment picture. April’s ADP private employment report came out slightly higher than expected at 204,000 private jobs added in April against a prior forecast of around 200,000. Though the outcome met expectations, it was significantly lower than in previous months. It should also be kept in mind that the ADP report is typically not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically.

Other pre-NFP indicators include the ISM non-manufacturing (services) PMI employment component, which showed expanding job growth at 53.6 in April, but was substantially slower than March’s 56.6 reading. The manufacturing sector (ISM manufacturing PMI) also showed expanding employment at 54.2 in April, but was also substantially slower than March’s 57.3.

Finally, April’s weekly jobless claims have either been better (lower) than expected or in-line with expectations, and have remained near historic lows. The past two weeks, especially, have shown exceptionally low unemployment claims.

Forecast and Potential USD Reaction

With consensus expectations of around 190,000 jobs added in April, our target falls in the range of 180,000-200,000, given the mixed pre-NFP data inputs. Though the US dollar will likely be moved by a host of other fundamental factors, including continuing speculation on potential trade wars, any headline jobs outcome falling above this range should give the US dollar a boost to extend its recent rally. A result falling within the range will unlikely make much of a significant impact. And any reading that falls significantly below the range could result in a dollar pullback. Of course, the headline result, as previously noted, is not the only important data point. If wage growth figures surpass expectations, the dollar could see a more substantial boost on higher inflation and interest rate expectations.