US NFP Preview: Setting the Tone – ING
Research Team at ING, suggests that a solid jobs data could spark a
near-term USD revival and April jobs report might uphold the
stagflationary trend in US data.
“Were the April jobs figures to come in on a softer note, then this would endorse the weakness in activity and imply that lagging variables such as employment are also now turning lower. Conversely, if the labour data stays resilient then we will further linger in a state of limbo as either it is the activity data that is the aberration or the lags have yet to kick in. The April jobs report may in fact accentuate the stagflationary trends (soft activity, rising inflation) noted of late:
1) Payrolls to come in a tad softer than expectations (ING: +190k; consensus: +200k). While some indicators continue to signal a robust hiring backdrop, the softer ADP print suggests that there are some (albeit marginal) downside risks to jobs growth in April.
2) Upward bias in the unemployment rate still in place (ING: 5.0%; consensus: 4.9%). The discrepancy between payrolls and the household survey (from which the u/e rate is derived) is still evident, while the very strong labour force growth is unlikely to endure. A slight correction in both components may put some upward pressure on the u/e rate.
3) Robust underlying wage pressures should result in decent headline wage growth (ING: 2.4% YoY; consensus 2.4%). We note that the headline AHE measure has been hovering at the lower end of a range of US wage indicators, with the Atlanta Fed’s wage growth tracker continuing to tick higher (on a moving average basis). Thus, we think the odds of a positive wage growth surprise are slightly higher this month.
We suspect that much of the necessary USD correction (from a financial conditions perspective) has now occurred. Indeed, it is worth noting that a modest reversal in the dollar’s decline will not necessarily lead to a sharp increase in our FCI metric; indeed, one needs to differentiate between a warranted (fundamental) and unwarranted (risk-off) tightening of US financial conditions.
More recent USD weakness has exceeded fundamentals; the stars are aligned for a data-led correction. With financial conditions arguably less of a concern and markets barely pricing in a rate hike for 2016, we think USD price action is “fair game” now and will be a function of forthcoming US data. Indeed, we note that USD crosses are beginning to (i) exhibit a greater sensitivity to US data surprises and (ii) re-couple with changes in rate differentials; both of which suggest that a repeat of March (where markets largely ignored a sequence of strong US data prints) is unlikely. With long dollar positioning much lighter (spec markets are now net short USD vs. major FX), we think the conditions for a data-led USD correction are ripe. A solid jobs report would set the tone for a USD revival in May.”