Nervous markets await US nonfarm payrolls report

Nonfarm payrolls out of the US will hit the newswires on the first Friday of the year at 1330 GMT and the dollar is highly expected
to respond as investors have not yet framed a clear picture about the Fed’s 2019 rate strategy. Yet with more headwinds than tailwinds entering the year, the Bank’s tightening plans may appear overestimated.

The Bureau of Labor Statistics is anticipated to say on Friday that the economy created 177k new job positions in December, more than the 155k rise registered in the preceding month. On the other hand, the unemployment rate is projected to hold at the 18-year low of 3.7% for the fourth straight month, while average hourly earnings which usually receive the bulk of the attention due to their inflationary impact are seen slightly weaker at 3.0% y/y from 3.1% before, though still among the highest in a decade. The results could also prove that 2018 was the labor market’s best performance in two years in terms of job creation.

In evidence, the latest Beige book as well as PMI readings revealed that employers face difficulties to identify qualified workers, a fact that could force businesses to offer more attractive wages to fill positions in the coming months. This in return could push inflation back above the Fed’s 2.0% price target, forcing policymakers to raise interest rates more aggressively. Despite policymakers preparing two more rate hikes in 2019, a potential escalation in the US-Sino trade war, however, could make this scenario less likely, especially if this is accompanied by weaker data in the US and also in other key economies. With businesses feeling the tariff pressure on their revenues and Trump’s tax cuts effects fading, wage pressures could ease, discouraging spending and hence any further monetary tightening later in the year. Recall that Trump’s Republicans now have only partial control of the Congress so any efforts to boost growth could have trouble getting support. Given all this, it seems that the new year will be a more challenging one for the US President.

In FX markets, Monday’s lacklustre factory data out of China persuaded investors that US trade protectionism has already started to bite, turning the outlook over the global economy even more darker. Investors shifted funds towards safer assets such as the Japanese yen, sending the dollar slightly below the 109 level for the first time in seven months, with traders now looking at Friday’s nonfarm payrolls for a possible lift.

Better-than-projected readings could push dollar/yen towards the 110 psychological level, while a bigger surprise may also open the door for the 110.50 barrier before the 111 level comes into view.

Alternatively, a miss in the data could retest the seven-month low of 108.70 reached on Monday. A failure to hold above that mark could see the pair trading between 108.35 and 107.70.