The key issue surrounding today’s March US Nonfarm Payrolls report is whether or not the US labor market is improving enough to reduce labor market slack and push up wage growth (which should help inflation), in order to justify the Federal Reserve hiking rates again before the end of the first half of 2017. With Fed funds futures contracts already pricing in around a 60% chance of a rate hike when the FOMC meets in June, the jury is still out. Market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed’s defintion of “full employment” (at 5% or lower) since for October 2015.

Current expectations for today’s data remain strong despite seasonality concerns from economists, with the unemployment rate expected to hold at 4.7%, and the headline jobs figure to come in at +180K. Wage growth is due in around +2.7% y/y, slightly off of the +2.8% figure seen last month, which was near a seven-year high.

The aggregate forecast heading into this report has jumped higher the past few days. Wednesday’s March US ADP Employment report showed +263K new jobs created last month, easily beating expectations of an increase of +185K. Likewise, the March US ISM Services/Non-Manufacturing index eased slightly to 55.2 (from 57.6 previously). Using a 10-year rolling model, the ADP report and the ISM Services report can account for 89% of the changes in the NFP figure (R^2 = 0.89). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth around +200K.

It’s important to recognize that due to the unseasonably warm weather the United States experienced in the first few months of the year, jobs growth was probably ‘pulled forward’ from forthcoming jobs reports. There may be a giveback period, where NFPs sag relative to the outstanding figures seen in January and February. Nevertheless, with respect to the NFP report on Friday, so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.7% through the end of 2017 (as per Fed Chair Janet Yellen’s commentary at the end of February).