Non-Farm Payrolls Preview: Can A Wage Top Up Can Win Over Trade Turmoil? 3 Scenarios

• The Non-Farm Payrolls report focuses on wages once again especially after the blockbuster report for January.
• Expectations are slightly lower, and an upside surprise cannot be ruled out.
• The trade worries are set to cast a dark cloud on any outcome. 

The Average Hourly Earnings section of the Non-Farm Payrolls report remains the primary figure to watch. Higher wages imply a job market that is genuinely around full employment and more importantly, it means more profound inflationary pressures. And thus a quicker interest rate rises and a stronger US Dollar.

Are wage rises picking up?

US unemployment is at very low levels, at 4.1 percent. According to economic textbooks, low unemployment should have yielded higher wages as demand outstrips supply. However, pay rises were stuck at around 2.5 percent YoY for quite a long time. The explanation was that the unemployment rate understated the situation as the participation rate was low. Job growth continued at a healthy clip of around 200,000 jobs per month, showing there is more slack in the economy and also explained why wages were not going anywhere fast.

Yet in the jobs report for January, wages started picking up. They rose by 0.3 percent MoM and 2.9 percent YoY. Alongside upward revisions for the previous months and other upbeat economic data, it seemed that salaries are rising in a more sustainable manner.  Some asked to curb the enthusiasm, waiting to see if this is genuine or perhaps just another one-off. 

Expectations for February stand at a monthly gain of 0.2 percent and a more modest YoY increase of 2.8 percent. These are prudent expectations from markets that have been bitten once and are now twice shy but still reflect optimism. 

However, there are good reasons to believe the outcome may be 2.8 percent YoY or even better. The Atlanta Fed's analysis concluded that wages are rising at a rapid clip especially among young workers. The forward-looking ISM purchasing managers' indices for February also point to elevated economic activity: both figures beat expectations.

The ADP report for the private sector also showed a second month of job growth around 235,000, an environment that allows for faster wage rises. Moreover, jobless claims during February continued dipping to lower ground, eventually reaching the lowest levels since 1969. 

All these positive signs open the door to higher wage growth.

Trade elephant in the room

Since March 1st, when Trump announced he would impose tariffs on steel and aluminum, headlines about trade wars have dominated the financial and not also not financial press. The US Dollar advanced against commodity currencies but suffered losses against the safe-haven Japanese Yen and the Euro.

The EU has threatened with retaliation, and other countries expressed concern and anger. Since then, the US President doubled down on his intentions to impose tariffs and is set to sign them on March 8th according to reports. He lost his business-friendly economic adviser Gary Cohn and did not succumb to pressure from his Republican peers. 

The ongoing worries about a trade war have caused some to reconsider expectations for global growth and recalibrate potential rate hike expectations. Assuming no last-minute relief, the Non-Farm Payrolls report would need to be extraordinary, either good or bad, to make its mark on markets for more than 30 minutes after the publication. 

Three Scenarios

1) America pays, 2.9 percent and especially 3 percent YoY or higher, would be a boon to the US Dollar. It could rise across the board, perhaps with a more limited response against the haven yen. It would cement an upgrade of the Fed's dot-plot from three to four rate hikes in 2018, something that would already appear in March.

2) Within expectations, 2.8 percent or 2.7 percent would not be beneficial to the US Dollar especially against the resilient Euro, but it could still have an OK showing against commodity currencies. Four rate hikes would still be reasonable, but that is mostly priced in.

3) It was only a one-off: 2.6 percent or below: A significant setback, falling back to the previous averages, would be a big blow to the greenback, implying perhaps only three rate hikes in 2018. Commodity currencies and the Euro could rise nicely while the safe-haven yen may lag behind.

The headline change in jobs still matters, especially if wages come in within expectations. An increase of 200,000 positions is on the cards, just like in February. A gain of over 250,000 would be US Dollar positive and under 150,000 would be US Dollar negative. Anything in between will leave the stage for wages.Other figures such as the Unemployment Rate (expected to edge down from 4.1 percent to 4.0 percent) or the Labor Force Participation Rate (projected to slide from 62.7 percent to 62.5 percent) are also of interest but usually are not market movers. 

Trading the event with the Market Impact tool

Follow the publication of the figure on the economic calendar. Watch out for the data from the Market Impact tool, projecting the potential price changes according to the deviation. Here is the Market Impact Studies Users Guide

•  Average Hourly Earnings (MoM)
• Primary currency pair: EUR/USD
• Tradable Positive Trigger: + 1.53 deviation [SELL Pair]
• Tradable Negative Trigger: -1.46 deviation [BUY Pair]
• Key Resistance Level: 1.2445
• Key Support Level: 1.2350

In the last five releases, the EUR/USD moved, on average, 43 pips in the 15 minutes after the release and 84 pips in the 4 hours after the release.

The previous release had a surprise of +1.24 measured in terms of deviation, and the EUR/USD reached the 83 pips of volatility 15 minutes after the release and 111 in the following four hours.

If it comes out at higher than expected with a deviation of +1.53 or higher, the pair may go down reaching a range of 36 pips in the first 15 minutes and 64 pips in the following 4 hours. If it comes out lower than expected at a deviation of -1.46 or less, the EUR/USD may go up reaching a range of 25 pips in the first 15 minutes and 126 pips in the following 4 hours.