Has NFP Killed a Fed Rate Hike This Year?

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Market Drivers April 6, 2015

Markets remain closed for Easter holiday
US ISM Non Manufacturing on tap
Nikkei 0.19% Europe Closed
Oil $50/bbl
Gold $1218/oz.

Europe and Asia:
EUR Spanish Unemployment -60.2K vs. -18.3K

North America:
USD ISM Non Manufacturing 10:00

CAD Ivey PMI 10:00

With all the European and most Asian markets still closed for Easter and Monday and Chinese holidays the currency markets essentially stood still on the first trading day of the week awaiting the open of US trade as the first post holiday reaction to Friday’s NFPs.

The release of Friday’s Non Farm Payrolls on Good Friday offered little opportunity for markets to react fully to the disappointing data with most capital markets in US closed for holiday. Therefore today will the be the first full day when market participants return to work and it will be interesting to see if the dollar has any follow through to the downside after the disappointing data.

The NFPs on Friday missed their mark badly, as the combination of bad weather and strong dollar finally caught up with the US labor market which was able to generate only 126K jobs versus 246K eyed. Furthermore the months prior data was revised lower by 69K jobs. Overall this was the first time in 12 months that US failed to generate more than 200K jobs indicating that the economy is clearly starting to slow.

Although the Fed policymakers generally do not focus on any individual data points, the broad tenor of their strategy to normalize rates is based on the assumption of accelerating US growth. Last Friday’s NFP report which clearly and conclusively showed that US is decelerating is likely to suspend any action out of the Fed for the time being. Although US growth remains positive it has lost serious momentum and the Fed will not be willing to risk any further deceleration due to any premature tightening action on their part.

Today’s ISM Non-Manufacturing report could provide the market with further insight into the state of demand in the US economy’s largest sector. Analysts are looking only for a modest decline to 56.6 from 56.9 the month prior. And indeed if the data prints within expectation it will be viewed with relief in the aftermath of the disappointing NFP report. However if the ISM Non Manufacturing comes in considerably lower than forecast, it will offer yet another argument against normalization as deceleration of US growth becomes a more powerful theme in the market.

USD/JPY which held up relatively well in the aftermath of Friday’s report and continues to trade around the 119.00 figure in quiet London dealing could come under a much sustained selling assault if the ISM data misses as well. For now the 118.50 level continues to hold, but if the markets begin to question the whole notion of a rate hike in 2015, the pair could see face much stronger selling than it has so far.

Boris Schlossberg
Managing Director

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