NFP Preview

With the Fed all but certain to raise rates at the next meeting, tomorrow's employment data is expected to affirm its policy outlook.

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NFP and the Fed

Through most of February, there was quite a bit of speculation that the Fed could raise rates by 50 basis points at its next meeting. That was due, in part, to a combination of high inflation and a surprisingly good result in January's NFP. But, since the invasion of Ukraine, that expectation has almost died out, with markets pricing in just a 2% chance of a "double" rate hike.

The remaining 98% agree that the Fed will raise rates. So, what kind of impact can NFP have? If the results are above expectations, it can only confirm what is already expected: A rate hike. Even if there were to be a substantial beat in employment numbers, it's unlikely to overcome the general concerns associated with the fallout from the Ukraine crisis.

Where things could change

February is, of course, a shorter month than January, meaning there is less time to hire people. Not surprisingly, February tends to have a smaller number than the previous month. Current expectations are for there to have been 400K jobs added, compared to the 467K reported last time around.

What concerns the Fed in terms of inflation policy is average hourly earnings, which has gained renewed focus. The consensus is to have accelerated slightly to 5.8% y/y from 5.7% prior. Still not as fast as CPI. The Fed is worried about a potential wage-inflation spiral, so a substantial beat in this figure could potentially revive talk of a "double" rate hike, if not in March then at the following meeting.

The unemployment rate is expected to tick down to 3.9% compared to 4.0%. However, that is dependent on the labour participation rate; and recently, despite substantial jobs creation, the unemployment rate hasn't gone down as much as expected due to more people coming back to the labour force.

GBP/USD

The British pound / US dollar pair has stalled heading into the NFP data.

On the 30-minute chart, GBP/USD has failed to reach overhead resistance at 1.343 and has now broken below a rising trendline and back under the 50 & 200-period moving averages, suggesting a possible trend reversal. Bearish RSI divergence across the two most recent peaks in the price is also bearish.

A move back over the broken uptrend line, and then a move over 1.343 resistance would be needed to confirm the uptrend has resumed.

Source: Spreadex trading platform

Key takeaways

Fed is expected to raise rates by 25 basis points regardless of February's jobs tally. However big gains could mean faster rate hikes after March (+ve USD), whereas a shock smaller number could call into question the Fed’s inflation-fighting ability (-ve USD).

Investors might do well to focus primarily on average hourly earnings and secondarily on labour participation rates. The two NFP components are the only chance to revive the "double" rate hike in March narrative.