US: NFP report more important than normal for USD performance - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the very stable market conditions overnight highlight that the non-farm payrolls report is likely to prove even more important than normal for US dollar performance in the near-term.

Key Quotes

“The Fed has clearly signalled that they are moving closer to resuming rate hikes with the timing of the next hike dependent on the incoming economic data. The Fed has been reassured by the robust rebound in employment growth in recent months following weakness evident in the May. The underlying trend for employment growth has slowed modestly this year but remains solid averaging 186k jobs created per month to the end of July compared to 228k jobs created in the same period of last year.

Another solid employment report today which is broadly in line with the underlying trend could provide a green light for the Fed to resume rate hikes this month. Our own NFP regression model is projecting job gains of 189k in August supporting our updated call for an imminent rate hike. If the NFP report is solid it should encourage further US dollar strength ahead of the FOMC meeting on the 21st September as the interest rate market should move to price in a higher probability of an imminent rate hike. It will likely take lightning to strike for the US dollar to weaken materially requiring a significant slowdown in employment growth similar to in May which prompted the Fed to delay the planned rate hike pencilled in for June or July.

The market is even more sceptical that the Fed will resume rate hikes this month following the release yesterday of the much weaker than expected ISM manufacturing survey for August. The survey revealed that business confident in the manufacturing sector declined sharply by 3.2 point to 49.4 in August fully reversing the gradual improvement which had taken place since early this year. It provides a cautionary signal over the outlook for the US economy but may exaggerate concerns.

The ISM manufacturing survey has averaged 50.2 over the last year during which time manufacturing output has stagnated. The August ISM manufacturing survey is signalling more of the same ahead. We remain more optimistic expecting a gradual recovery as the negative shock from the sharp drop in the price of oil fades. We do not believe that the disappointing August ISM manufacturing survey rules out a rate hike this month. The ISM manufacturing survey was even weaker at 48.6 in November just before the Fed raised rates for the first time in December.”