What’s The Most Important Data Point in Today’s NFPs?

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Market Drivers February 6, 2015

All eyes on NFP
RBA Statement points to more cuts
Nikkei .82% Europe .50%
Oil $52/bbl
Gold $1268/oz.

Europe and Asia:
AUD AIG Index 45.9 vs. 44.4
EUR German IP 0.1% vs. 0.4%
GBP UK Trade -10.2B vs. -9.0B

North America:
USD NFP 8:30

CAD Labor 08:30

Its been a typically quiet pre-NFP night with most of the majors tracing out narrow ranges as traders await the marquee event of the week. The median estimate for NFPs is 230K and anything above 200K will be viewed as generally positive indicating that the pace of US recovery remains steady.

One key worry ahead of the data is the very sharp decline in the ISM Non-Manufacturing employment component. The gauge slipped more than 4 points from 55.7 to 51.6 and is now just mildly above the 50 boom/bust line. The services sector is by far the biggest component of the US economy and such a steep decline in the month does not bode well for the headline number. Taken together with the possible loss of jobs in the oil patch, today’s NFP could set up for a miss.

A print below the 200K mark would no doubt push dollar lower especially against the yen but the key variable that the market will focus on will be wage growth. Average hourly earnings are expected to jump to 0.3% from -0.2% the month prior and if they meet expectations the initial knee jerk selloff from any miss of the headline data could be reversed. However if both jobs and wage disappoint dollar bulls could be in for a long day.

The Fed has clearly communicated that it is inflation focused and with headline inflation now very low due to the collapse of energy prices and with wage inflation non-existent the Fed would have no reason to normalize rates for the foreseeable future. In that situation the market may push its expectations for a rate hike until next year, bringing the dollar rally to a halt.

Technically, the currency markets have already been expressing doubt for the better part of the month as USD/JPY remained capped at the 118.25 level making lower highs through this period suggesting that speculative flows are liquidating rather than accumulating the pair. A big miss on both headline and wage growth today could be the catalyst that pushes USD/JPY back to its longer term support at 115.00. On the other hand if the data surprises to the upside and more importantly shows strong wage growth, sentiment could shift in a dime as expectations of a June rate hike will move front and center.

Boris Schlossberg
Managing Director

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