US economic growth, QE3 and NFP

The monthly Non Farm Payrolls (NFP) report, which is due to be released on Friday 2 December at 13.30GMT by the US Bureau of Labor Statistics, will be closely watched by the market as the results will offer indications as to the health of the US economy. The NFP is considered the most important and influential economic report for the currency markets because it shows the number of paid jobs added or lost in the US economy in the last month, excluding the farming industry. NFP data reveals the strength of the US employment sector and provides an indication as to whether the world’s largest economy is expanding or not, and at what pace. Strong job growth boosts consumers’ confidence, which in turn increases consumer spending. High consumer spending can fuel growth, as it is the main driver of the US economy.

Is QE3 on the way?

The Federal Reserve Monetary Committee (FOMC) meeting minutes revealed in November that Ben Bernanke and his colleagues cut economic growth forecasts and also downgraded the inflation outlook for the near term. This raises the possibility of another round of quantitative easing. Lower inflation expectations can encourage monetary stimulus as an increase in money supply into the economy can have an inflationary effect. The minutes also showed that some FOMC policymakers are worried about the slow pace of the US economic recovery saying that the central bank may need to consider implementing further easing policies.

Speculators argue that the Fed may announce a plan to buy mortgage-backed securities instead of treasuries which may boost the ailing US housing market as it continues to constrain the US economy. The mortgage bond market was at the epicentre of the financial crisis when it began in 2007. Another option would be to launch a third round of Treasury bond purchases following the completion of the $600 billion bond purchasing program which ended in June. During a recent news conference, Bernanke said that the pace of recovery is frustratingly slow, unemployment stubbornly high, and that the Fed remains ready to act and ensure the economy is improving.

US growth revised lower and US data disappoint

Data last week showed the US economy grew slower than originally announced in the third quarter after a downward revision to an annual rate of 2%. The figure disappointed investors who were expecting growth to remain at 2.5% but this rate was still the strongest increase this year compared to 1.3% growth in the second quarter.

The latest economic data showed no sign of acceleration in the US economy.  The Durable Goods, Consumer Spending and Manufacturing Index all disappointed investors by showing lower than expected figures. While US New Home Sales data rose slightly in October, prices fell to their lowest level of the year showing that the housing market remains weak.

Jobs data

Friday’s Non Farm Payrolls report is expected to show an improvement in the labour sector with predictions of 119,000 new jobs added into the economy in the past month. At 206,000, the ADP Employment Change data was also significantly higher than the expected figure of 130,000. With the eurozone debt crisis deteriorating, Greece and Italy trying to escape default and surging eurozone government bond yields, an increase in the number of jobs may reveal that the US economy remains on the path towards recovery.

In the case of the NFP data registering close to or significantly above expectations, the dollar may strengthen as this will be an indication of growth and, subsequently, QE3 expectations will start to fade. If the NFP report reveals a significantly lower figure than anticipated, we may see the safe haven US dollar plummet. In either scenario, a high level of volatility is expected, which may lead to large price swings.

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