US labor data possible scenarios

The US labor report, the last key release ahead of US Federal Reserve monetary policy meeting in early May, will be closely watched by the central bank, for more clues about their next steps.

After the shockwaves from the largest bank failures since the last financial crisis in 2007/09 eased and the worst scenario for the financial sector has likely been avoided, the US policymakers can return to their main task – putting high inflation under control and pushing it towards the central bank’s 2% target.

The Fed shifts its focus to the labor market, after the most recent reports showed stronger than expected drop in job openings (JOLTS Feb 9.93M vs 10.4M f/c; Jan 10.56M), significantly lower hiring in the US private sector (ADP Mar 145K vs 200K f/c, Feb 261K) and initial jobless claims jumped to 228K last week, vs 200K f/c, generated initial signal that labor sector is cooling.

The US non-farm payrolls are expected to increase by 239K in March, compared to 311K new jobs added in February, unemployment is expected to remain unchanged at 3.6% and annualized average earnings growth to ease to 4.3% in March from 4.6% previous month.

Although the forecasted NFP and earnings numbers are expected to drop and unemployment is low, supporting view that conditions in the sector are getting looser, many economists think that the labor market is still quite tight and current conditions seen insufficient to provide significant contribution to lowering inflation towards Fed’s 2% target.

The notion is supported by the fact that NFP has registered a streak of better than expected figures in past eleven months and is still holding above its pre-pandemic average, while payroll growth is also elevated and holding well above 2%-3% average before coronavirus pandemic and both carry the risk of further fueling price growths.

Possible scenarios

The dollar would rise if today’s data came in line with expectations or above, as the numbers will be considered as relatively robust and support Fed in further raising of interest rates, as well as keeping high borrowing cost until inflation shows significant signs of easing.

Conversely, the greenback would come under fresh pressure if NFP drops significantly below consensus and earnings figure eases further, as this would signal that the US economy is weakening, but price growth is slowing, which would fuel prospect of longer pause in Fed’s tightening cycle.

Finally, scenario which cannot be ruled out in the current turbulent times – hiring drops significantly but wage growth accelerates.

The situation when the economy and labor sector stagnate or weaken, but inflation continues to rise, is known as stagflation and will cause more headache for the US central bank.