NFP to Show Slowing Labour Market Dynamism

US employment figures scheduled for Friday release are anticipated to validate recent evidence pointing to diminishing worker mobility and scarce availability. Yet, questions remain whether this will sufficiently sway the Fed towards moderating its policy adjustment path.​

Slowing Labour Growth and Interest Rate Expectations

The market is anticipating that upcoming US labour data will demonstrate slowing wage inflation, which may support hopes for an earlier interest rate cut. Currently, futures markets are pricing in the first rate reduction occurring at the June meeting, representing a notable recalibration from one month ago when a rate hike in March was anticipated. Fed officials have previously highlighted tightness in the jobs market and the pace of wage growth outstripping inflation as a key impediment to achieving their inflation target. Therefore, a stronger-than-forecast employment situation could negatively impact stock prices should it lead to a further postponement of rate cut expectations.

Consensus forecasts are that the US economy added 198K jobs in February, lower than the 353K rise reported for January. However, monthly employment reports have exhibited a trend wherein initially published figures surpass projections but are subsequently revised down. As such, an outcome above estimates in this period may be offset by a downward revision to last month's robust growth.​

Expected Pay Rise Trends

The unemployment rate is expected to remain unchanged at 3.7%. However, the key focus will likely be on average wages, which have demonstrated a gradual slowdown. The Fed would prefer to see this trend continue to ease inflationary pressures. Last month's report came in unusually high, with substantial growth in payrolls and wages. It is expected that seasonal effects caused January's results to be an outlier, and these could be revised down to the average.

Average hourly wages are forecast to fall back to a more typical 0.2% growth rate in February from the 0.6% reported in the previous month. On an annual basis, this would bring wage growth to 4.3%, down from 4.5%, but still well above the inflation target and even the latest inflation reports. Therefore, real wage growth would be in the range of 1.2-1.3%. While this could provide some expectation for the economy to continue being resilient, it would also give the Fed room to sustain higher interest rates for longer. The recent record highs in US indices, including the S&P 500, have relied on hopes that rates will reduce sooner rather than later.​

SPX 500 Edned A Wedge?

The SPX 500 index may have concluded an ending wedge pattern around the 5160 level, allowing a potential decline towards 4935. However, if support is found at 5060 or the psychologically important 5000 mark, a move above recent peaks could initially spark additional gains targeting 5200 – the 100% projection of the 4935-5090 leg. Surpassing the local resistance may unblock a path to 5300 next.

Source: SpreadEx / SP500

Key Takeaways

The upcoming NFP is expected to show slowing labour market dynamism and tightness, with the average hourly wage growth rate falling back to a more normal 0.2% in February from 0.6% in January. This could help justify market hopes of an earlier Fed rate cut. However, a stronger-than-expected report risks postponing rate cut expectations if it points to labour market tightness continuing to push inflation above target. The consensus forecasts 198K jobs added in February, down from 353K, with downward revisions to prior months also likely.​