NFP look ahead - will this confirm a rate hike?

The past fortnight has seen an incredible rise in the market expectations with regards to whether Janet Yellen and co will raise rates next week. With tomorrow’s US jobs report approaching, it is clear this could be the event that pushes the Federal Reserve over the line.

The rise of market expectations has been tracked through the use of both Bloomberg (100%) and CME’s (90.8%) Fed funds tools, which currently imply an overwhelmingly hawkish view for the upcoming meeting. To some extent, this seems a little overdone, but given Ms. Yellen decided to tout a hawkish line, despite the fact the markets saw an 88% rate rise chance, perhaps it is justified. In either case, a strong payrolls number could put the cherry on that cake, with a strong showing likely to firm up the dollar once more.

Wednesday’s ADP reading is somewhat of a contentious tool by which to gauge where the headline NFP number will go. The main difference between the two figures is the ADP reading is focussed more on the private sector, and misses the government jobs that are encompassed in tomorrow’s release. Nevertheless, there is clearly correlation between the two, and with the ADP figure coming well above expectations at 298,000, this could point towards another strong reading on Friday. That represents the highest reading since April 2014, and the third highest number since the 2008 recession. With markets currently expecting around 180,000, from the 227,000 last month, there is room for another big number, if we are to see the ADP jump replicated.

The reasoning behind such a move is clear, given the rising business confidence coming about as a result of a very jobs-focused Trump. His insistence that firms selling to the US should produce there too is likely to have an effect. Crucially, with firms having to abort plans to offshore jobs as a means to save money, it will be vital to see how wages react over time. Current expectations point towards a rise in average hourly earnings to 0.3% from 0.1%, with unemployment falling from 4.8% to 4.7%.