Cautious Start Seen Ahead of US Jobs Report

• Aussie down 1% as RBA opens door to more rate cuts;

• Traders cautious ahead of US jobs report;

• Weak ADP raises concerns about NFP number;

• Wage growth arguably more important to Fed.

We’re seeing some expected caution in the markets as we near the European open on Friday, with investors opting to remain on the fence ahead of this afternoon’s jobs report from the US.

Asian markets are on course to end the week on a weaker note on the back of this risk aversion, although one market that is currently in the green is Australia, which is being boosted by the sell-off in its currency overnight. The Australian dollar is down around 1% against the greenback after the RBA appeared to open the door to further interest rate cuts in its quarterly monetary policy statement. The RBA already cut interest rates to record lows of 1.75% on Tuesday in response to a surprise drop in prices and its decision to lower its forecasts suggests it expects this to be a prolonged period of weaker inflation.

This is not uncommon in the lead up to the release of the US labour market figures but it probably hasn’t been helped by Wednesday’s ADP employment data which fell well short of expectations at 156,000. While this isn’t historically the most accurate of estimates of today’s non-farm payrolls number, it’s hard to ignore such a large miss that suggests we could be in for disappointment today.

That said, I guess that depends on what is most important to investors today. In reality, with unemployment at 5% and substantial numbers of jobs being created every month, this one number is probably not that significant. Although, that does not normally prevent the markets from reacting anyway.

The bigger concern for the Fed right now is inflation, with wages not growing near as much as they would like to see. This could be a reflection of the low global inflation environment we find ourselves in as well as the quality of jobs being created but with the amount of slack now significant diminished, we should expect wage growth to start picking up. Unfortunately, this has been the case for some time and wages have remained subdued.