The U.S. economy likely created more than 2 million jobs last year, according to data from the Bureau of Labor Statistics and estimates for Friday's employment report, but the impact of the lowest headline unemployment in decades may not translate into notably higher wages until the impact of Republican-led tax cuts is fully understood.
Economists expect employers added 190,000 jobs in December, according to the consensus estimate for today's non-farm payroll release at 08:30 am eastern, down from 244,000 in November and the lowest reading since September's hurricane-impacted total of 38,000.
The consensus could be conservative, however, in the wake of ADP's reading of private sector jobs growth Thursday, which showed a much-stronger-than-expected gain of 250,000 over the month of December.
However, investors are more likely to be focused, once again, on the pace of wage increases in a workforce that is likely to see the lowest level of headline unemployment since the Korean War sometime later this year. Hourly earnings are expected to have grown at a 2.5% clip, according to Street forecasts, a figure that matches the November total.
That number is expected to be crucial for investors' expectations of the Fed's 2018 rate path under new Chairman Jerome Powell. At present, around 60 basis points has been priced in to the current projections, according to futures prices, with the CME Group's FedWatch tool indicating a 73% chance of the first hike coming on March 21 - up from 50.3% a month ago.
That isn't being reflected in financial markets, however, as the U.S. dollar index, a measure of the greenback's strength against a basket of six global currencies has slumped to an mid-September low of 92.03 and benchmark 10-year U.S. Treasury bond yields continue to trade below the 2.5% mark despite improving data that suggests the economy continued to grow at a near 3% pace over the final three months of last year.
Saxo Bank's currency strategist, John Hardy, thinks the markets will have to wait for data from January, February and March, which will be the first to reflect the impact of the $1.5 trillion tax reform bill passed by Republican lawmakers in Dec. 22, in order to judge whether the current dollar weakness will extend through the first half of the year.
"So, of course, the most interesting scenario today would be an upward revision of the November Average Hourly Earnings data together with a stronger than expected December number," Hardy said Friday. "This is not to say it is what we will get, it is simply the most interesting stress-test of the market narrative."
"Payrolls and the unemployment rate deserve less attention unless they are particularly shocking," he added.
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