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Friday brings the latest US Non-Farm Payroll release covering February. The monthly Non-Farms number is arguably the most highly anticipated data point on the economic calendar. This is because it provides a timely update on US employment, and maximising employment is one part of the Federal Reserve’s dual mandate. The other part is maintaining price stability which is a fancy way of saying that the Fed has to keep an eye on inflation. The Fed also has another, lesser publicised, duty which is to maintain moderate long-term interest rates. It could be said that it has been failing in this regard for many years now, but more on that later.

The consensus expectation is that tomorrow’s number will come in around 185,000. If so, this would represent a bit of a fall-off from January’s reading of 227,000. Yet this would be entirely reasonable given that January’s number was itself well above the 170,000 expected. But the question is just how important this month’s number will prove to be? The reason for doubting its importance has to do with next week’s Federal Reserve meeting. In months gone by, investors used Non-Farms as a measure of how likely or not the Fed was to adjust rates at its next meeting. Yet as the Fed has only changed its cost of borrowing twice since December 2008, we can see that getting excited about Non-Farms has been an exercise in futility. Nevertheless, an unexpected number certainly moves markets, although this time round Fed members have already made it abundantly clear that they’re ready to hike rates next week. The President of the New York Federal Reserve and vice-chair of the FOMC William Dudley got the ball rolling last week when he said that the case for tightening had “become a lot more compelling." Mr Dudley is considered to be one of the more dovish members of the FOMC and his comments led to a rapid recalculation of the odds on a rate hike.

Then at the end of last week Janet Yellen said that an increase at the March FOMC meeting “would likely be appropriate”, as long as incoming data continues to confirm officials’ outlook. This gave the green light for a rate rise, although Dr Yellen appeared to be ready to close the door should Friday’s payroll data be poor. Actually, it seems very unlikely that members of the Fed (and there were plenty of others who all went hawkish last week) would indicate so strongly that a March rate hike was on the cards if it was in any doubt. And then we had Wednesday’s ADP jobs report. The ADP Payroll is poor at predicting the actual number of Non-Farm Payroll jobs, but very good at flagging big upside or downside surprises. As the ADP came in well above expectations, we can expect Friday’s Non-Farms to do so as well. Consequently, there should be very little danger of Friday’s jobs data throwing the Fed off-course.

In fact, the danger now is that the Fed has taken the gloves off when it comes to tightening monetary policy. The central bank has been desperate to “normalise” rates, not least so they will have some room to cut once the US economy runs out of steam. But they have held back from doing so, missing a number of opportunities in the first half of last year, then being constrained by political factors ahead of the US Presidential Election. Now they have an administration which is economically bullish, business-friendly and promising great dollops of fiscal stimulus. On top of that, the Fed will be less concerned about a possible equity market correction now since the post-election rally. So, in the absence of a market-melt-down or geopolitical shock, maybe we should be prepared for the Fed to tighten monetary policy each and every quarter until the fed funds rate is nearer 3% or so. That would go some way to the Fed fulfilling its other duty of maintaining moderate long-term interest rates. The question is how equities fare once all those corporations that have gorged on share buy-backs see their cheap funding dry up.

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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