Investors are gearing up for the delayed release of the United States Nonfarm Payrolls (NFP) data, which is set to be published at 13:30 GMT. This report will provide critical insights into the current state of labor demand, as economists closely monitor its implications for the economy. The NFP data is a key component of a broader jobs report that encompasses the unemployment rate and other important labor statistics.
Against this backdrop, the USD is trading defensively, a sign of risk aversion ahead of the NFP release. As of this writing during Tuesday’s Asian trading session, the USD/CAD pair floats just under 1.3775. Traders are wary of the fundamental developments, giving the currency pair a very tight range. The next batch of data has the potential to dramatically influence the currency markets, framing investor sentiment and trading strategies for weeks to come.
Anticipation Surrounding Nonfarm Payrolls
The Nonfarm Payrolls itself is the most watched of all components that make up the NFP report. It offers an unparalleled picture of private sector job creation across nearly every field—except farms and a small number of other jobs. Watchers forecast no change in the US unemployment rate, still at 4.4% for November. This forecast provides an early look at the restiveness of the labor market.
Economists are especially eager to know how the NFP data will be affecting labor demand and wage growth. Retail sales are expected to increase by 0.2% MoM. This strikes us as positive. We expect a resilient consumer to continue driving strong consumer spending and help drive positive overall economic activity.
The upcoming report is not just about numbers. It reflects broader economic conditions and trends. Consequently, market participants are getting ready for increased volatility in the weeks after the release of the data.
“The underlying inflation is around 2.5%” – Bank of Canada (BoC)
USD Under Pressure Due to Market Sentiment
The US Dollar Index (DXY) today wobbles near an eight-week low near 98.15. Yet this movement is an unmistakable indicator of market sentiment towards the USD right now. Considerations like the unforeseen strength of recent inflation reports and a slew of recent positive economic indicators have added to this defensive posture. The Consumer Price Index (CPI) report last week confirmed our worst fears, with the annualized headline inflation rising to a level of +2.2%. This increase was lower than the forecasted increase of 2.4%.
In addition to inflation concerns, the Bank of Canada (BoC) has stated that “economic slack would roughly offset cost pressures linked to trade reconfiguration.” This sentiment underscored a desire for a measured approach back to economic normalcy. It brings out more fully the importance of watching labor market data in parallel with inflation data.
As investors wait for next week’s NFP, downside or upside surprises that are large enough to catch the market’s full attention could change the game.
Components Impacting Market Reactions
While Nonfarm Payrolls and unemployment rate get all the glory as key indicators, it doesn’t stop there. Beyond the headline number, the Participation Rate and Average Weekly Hours will be particularly impactful in determining market reactions following the release. Together, these metrics paint a more complete picture about how healthy the labor market is and how engaged employees are.
The participation rate represents the share of the working-age population that is either working or searching for work. The average weekly hours are a measure of the work that’s on offer to those already employed. Both metrics are not only better at describing what’s booming v. busting.
Indeed, labor market dynamics are rapidly and profoundly shifting. It’s imperative that investors remain hyper alert and attuned to the above indicators, as they strongly shape currency valuations and the overall state of the economic outlook.