Markets are widely expecting the Fed to finish the year with a third-rate hike in December as the US economy grows above expectations and the unemployment rate is currently at the lowest tracked since 2000. Hence, the NFP report released this Friday is less likely to change the Fed's mindset at next week's policy meeting. However, what could be worthy of attention are the wage growth numbers which policymakers are closely watching to appraise inflationary pressures and thus whether they are on the right path with interest rate increases.
On Wednesday, the ADP Research Institute released private-sector nonfarm payrolls. These are considered by some as a preview of the more comprehensive government nonfarm payrolls which are due on Friday at 1330GMT. The ADP report showed that the private sector added 190,000 positions in the economy in November – slightly above expectations – compared to an eight-month high of 235,000 seen in the previous month. Nonfarm jobs created published by the Labour Department are also projected to narrow in November, falling from a 16-month high of 261,000 to 200,000. Besides that, average hourly earnings released with the jobs numbers are forecast to grow by 0.3% m/m in the given period after remaining stable in the preceding month, while the unemployment rate will likely stand pat at a 17-year low of 4.1%.
It should be mentioned that the rise in nonfarm payrolls and the slowdown in wage growth in October was mainly attributed to the return of workers to low-paying industries such as leisure and hospitality, as those employees remained temporarily unemployed in September in the face of catastrophic weather phenomena.
The labor market is currently considered to be operating near full-employment conditions. Subsequently, the Federal Reserve is hoping that a tighter jobs market would spur wage growth pressures, translating into higher inflation. Should subdued wages persist though, inflation would likely remain below the Fed's target of 2.0% for longer. Such an outcome is expected to make Fed policymakers rethink delivering three rate hikes in 2018, as they currently forecast.
But still, the Fed remains optimistic that a tighter labour market resulting in higher earnings could be achieved given that GDP growth has overshoot past forecasts this year. The last reading in Q3 showed annualized growth reaching 3.3%, its highest in three years.
In the forex markets, the dollar turned neutral versus the yen after it found support at the 111 key-level. If average hourly earnings surprise to the upside on Friday, immediate resistance could be met at the 113 key-level, which is also the 23.6% Fibonacci of the upleg from 107.31 to 114.72. Any violation of this point would turn the bias from neutral to bullish, opening the scope for a re-test at the 9-month high of 114.72. Alternatively, disappointing wage growth numbers could push prices down to 111.88 (38.2% Fibonacci), with stronger bearish movement shifting focus to the 111 key-level (50% Fibonacci).