What Will The Fed Need to See From NFP to Hike?

Market Drivers October 02, 2015
AU Retail Sales in line
UK PMI Construction bit better
Nikkei 0.02% Europe .78%
Oil $45/bbl
Gold $1108/oz

Europe and Asia:
AUD Au Retail Sales are 0.4% vs. 0.4%
GBP UK PMI Construction 51.5 vs. 51.3

North America:
USD NFPs 8:30

It's been a typically quiet pre-NFP night in the currency market with price even more muted by lack of liquidity from China which is on holiday. The markets appear content to simply tread water ahead of the marquee event of the week which could be the key determinant of Fed policy going forward.

On the overnight economic docket, traders got a glimpse of Australian Retail Sales which came in line at 0.4% and that number was received positively by the market which steeled itself for a possible downward surprise. Despite the collapse of commodity prices and the very difficult challenges facing Australia's mining sector, the rest of the AU economy appears to be holding up remarkably well. Retail Sales have remained positive for past 11 of 12 months and that trend may allow RBA to keep rates steady for a while longer.

The Aussie popped above 7050 but then ran into offers and eventually settled around 7035 as traders squared up ahead of the NFP.

The only other report of note was the UK Construction PMI number which came in considerably stronger at 59.9 versus 57.5 forecast. It was 30th consecutive month that construction has remained expansionary in UK and shows that the country's economy remains on the path of steady growth. Next week the market will get a look the most important sector PMI - services - and its beats like the other two cable may finally catch a bid as markets begin to appreciate the strength of the UK economy.

There is little doubt that BoE is preparing to tighten monetary policy in the foreseeable future yet cable has been inordinately weak especially against the euro and this divergence between price action and monetary policy has to rebalance itself sooner rather than later and perhaps next week will see a turn in that trade.

As to the NFPs, any number above 200K will likely prove supportive to the greenback, but the key metric of focus will be the wage gains. With inflation actually starting to turn negative again the Fed will need to see signs of wage growth in order to move off the zero bound level. With manufacturing economic data looking wobbly - most likely due to sharp cutbacks in energy, the Fed will be reluctant to make any policy moves unless the labor market shows some signs of tightening. At this point the monetary authorities are following the hippocratic oath - first do no harm. Therefore only a pickup in wages will convince them that the US economy is strong enough to absorb a rate hike