With the focus on US payrolls in the upcoming session and some heightened client interest in assessing the trade-off between risk and reward, here are a few insights that might be of interest.
US non-farm payrolls (11:30 p.m. AEDT / 1:30 p.m. BST) – consensus expectations:
- 490,000 jobs created
- 3.7% unemployment rate
- 5.5% average hourly wage
ISM Manufacturing (01:00 AEDT / 15:00 BST)
When the central macroeconomic theme is inflation and how aggressive central banks need to be to calm inflation, we have to ask how does the US payroll print become a volatility event in the markets?
Given the inflation theme, this certainly suggests that we should focus on the inflationary side of the report and that is the Average Hourly Earnings (AHE) – here the market expects 5, 5% (compared to 5.2% in February), which apart from a rapid peak in April 2020 is an extreme rate of wage pressure. The unemployment rate (U/E) is also an important factor and is expected to decline to 3.7% (from 3.8%) and approach the Fed’s projection of 3.5% for the end of 2022.
Of course, the participation rate will boost the U/E and if it stays close to 62.3% and we get a solid increase in job creation, we should see the unemployment rate go down – that should cement expectations that the US labor market is good. shape and that workers can demand higher wages, the backbone of good inflation.
So we are watching the AHE and U/E closely, but with a 76% chance of a 50bp rise at the May FOMC meeting and more than 8 rises on the full year , we have to ask ourselves what is the level that actually affects these expectations. . I think we would need to see wage growth closer to 6% to push the implied probability 50bps to 90% – A scenario that would initially be positive for the USD, especially against the JPY, CHF and EUR , and we should see US real rates higher, which could have a negative impact on gold.
EURUSD is one to watch, not only due to the impact of US rates on the USD, but we are still getting to grips with Putin’s decree for Russian gas payment in RUB. We saw a bearish engulfment in EURUSD daily, so a follow-up would see 1.0950 targeted.
An AHE reading closer to 5% muddies things up a bit, but shouldn’t derail expectations too intensely, as the big event risk remains the March US CPI print (April 12) , which could grow to an alarming 1.1% MoM. A rise in the unemployment rate could lead to USD selling off, especially if married to lower than expected wages – again hypothetical and one for the earnings playbook, but some believe that for the Fed actually reduces inflation, it must design a situation where the unemployment rate increases over time. A story of 2H22 potentially.
Monthly net jobs created
(Source: Bloomberg – Past performance is not indicative of future performance.)
In terms of job impressions, the market expects 490,000 jobs to have been added in March, which is a very healthy level of job creation. The Economist’s range is +700,000 to zero. For context, the most accurate economist (Avery Shenfeld at CIBC) holds 490,000 as a call, while the 3-month average is 582k. Instinctively, I think that if we see net job gains between 570,000 and 360,000 (1 standard deviation from the mean), that should be considered strong job creation, regardless of the median estimate of 490 000.
Implied overnight volatility – with expected movements within the day
(Source: Pepperstone – Past performance is not indicative of future performance.)
Looking at the options markets we can see that the overnight implied volatility is not too high at this point, it can push higher in the London trade – but the volatility markets are not screaming that the US ISM payroll or manufacturing will cause wild swings at this point.
To conclude, all aspects that fuel the inflation argument should promote the need to raise the fed funds rate quickly – in turn, this should be positive for the USD. However, given what is already priced, it will take a big surprise to really shake up the market.