The last Non-Farm Payrolls report before the Fed makes its last decision for the is expected to show the numbers we are used in recent years.
Yet even if we get a significant surprise, it is hard to see the Fed refrain from raising rates or even changing the dot-plot for 2018. Nevertheless, this is still top-tier data that will shake the greenback and wages play a key role.
Data back to normal
The US economy is expected to have gained 200K jobs in November. The previous two publications were skewed by the hurricanes and their aftermath. Now we are likely to go back to the averages.
What about wages? That has been of higher importance in recent years and also of growing frustration. Any rise towards the holy grail of 3% y/y was either revised down or not followed up in the following month. This time, a rise of 0.3% m/m is predicted, and it will probably compensate for the 0% change last month. But year over year, something around 2.5% is the name of the game.
3 scenarios for wages
Wages remain more important, with the growing concern about stubbornly low inflation. Higher salaries are key to lifting core inflation. Therefore, changes in paychecks will probably have the biggest impact on the greenback
- Wages between 2.4% to 2.6% y/y: This will probably leave the dollar mostly unchanged after the initial wobble. It will not be enough to draw attention away from the finalization of tax cuts, which are so far dollar positive.
- Wages rise to 2.7% or higher: This will be good news and will not be doubted by the hurricanes’ impact. It could have a longer-term positive effect on the greenback, raising expectations for higher core CPI in next week’s report and a firmer tone from the Fed.
- Wages drop to 2.3% or lower: This will be a big disappointment, casting further doubts about “transitory” inflation, lowering core CPI projections and setting the Fed to a less-confident and more “dovish” hike next week. The dollar will likely fall and struggle.
Why the Fed will not move
- The rate hike in December is well-telegraphed and the Fed does not like to surprise markets.
- This is the last major rate decision by Yellen and she will want to leave Powell a clean slate.
- A clean slate also implies no big surprises in the dot-plot, barring any outstanding disaster.
- Growth in GDP and growth in jobs are both looking good and they can argue for a rate hike on both topics.
All in all, the determination of the Fed around rates limits any huge moves, but wages are certainly eyed and they are likely to rock the dollar.
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