NFP: Salaries Lag Behind Inflation

In December, US unemployment is expected to remain low, but average salaries to remain below the inflation rate.

Analysts continue to get it wrong for the 5th month now

Over the last month, high-profile layoffs have been reported in the media. The more dramatic included over half of the workforce at Twitter and over 10K employees at Amazon. Yet the unemployment rate remains practically steady for months, despite continuing jobless claims rising to the highest level since February. Something unusual in the labour market is stumping most analysts, as they underestimated the number of new jobs created for five successive months.

The consensus is that the US added 200K jobs during December, down from the 263K reported last month. This would be the third time in a row that the average of predictions came to that number. If analysts were to get it right finally, it would be the worst jobs data since the end of 2020. As for the other components, the unemployment and labour force participation rates are expected to remain largely unchanged.

Fast Fed and slow ECB, but EU unemployment already hit

Employment figures typically are a lagging indicator, and the Fed was swift in hiking rates by 425bps since March. It might be a factor that it takes time for the effect of policy to hit the labour market. This could imply that the Fed keeps rates higher for longer, as the FOMC members have repeatedly said.

Meanwhile, the Euro Area has a significantly higher unemployment rate at 6.5, above what is considered "structural". The ECB has been slow to raise rates, weighing on the Euro against the dollar. With the latest inflation data coming in softer than anticipated, the ECB might have more
reason to keep rates lower to support the fledgling economy. Although Lagarde has said it's essential to avoid a wage-price spiral, wage growth in the shared economy has remained less than half of what it is in the US and well below the inflation rate. Another point in favour of the interest rate spread between the dollar and the Euro to remain wide - unless core inflation proves to be stickier than thought.

EUR/USD

EUR/USD has recently completed an ending wedge pattern, typically bearish at highs, but also a rising flag. A break below the $1.0482 swing high, where the first wedge peak lies, will increase the chances of a downward spiral to $1.0220 -the first trough's level. Conversely, the upper flag trendline breach could likely continue above $1.0736, validating the flag instead. Trades may consider the height of the flag (1.0736-1.0520) to figure out a potential top, adding ~215 pips to the breakout point. In the short term, the round levels of $1.06 and $1.0550 could act as support, whereas to the upside, $1.07 could be a local top.

Key takeaways

The NFP is expected to report 200k jobs added in December, lower than the 263k jobs added in November. This would be the 5th month in a row that analysts have underestimated the number of new jobs created, potentially due to lag. However, the ECB has been slow to raise rates in
comparison, with unemployment being significantly higher at 6.5% and wage growth half of that of the US. US unemployment is expected to remain low, but average salaries to remain below the inflation rate.