U.S. employers likely added 200,000 new jobs to the economy last month, according to the consensus forecast for Friday's non-farm payroll report, but investors are likely to once again focus on the pace of hour wage growth in order to gauge how the Federal Reserve will react to faster inflation in the world's biggest economy.
Average hourly wages are expected to have risen by 0.2% last month, economist expect, a move that would take the annual increase to 2.8% only modestly slower than the 2.9% pace recorded in January -- the fastest pace since 2009 -- that triggered a spike in U.S. Treasury bond yields to a four-year high and a 10% correction in global equity markets.
"To say markets were caught off-guard by last month's jobs report is quite an understatement," said ING economist James Smith. "Having been the missing link in the otherwise strong economic growth story, the evidence increasingly suggests wage pressures are building."
"This is one reason why we think there is a risk of another above-consensus wage growth figure today (albeit a repeat of last month's market reaction looks rather less likely)," Smith added.
Upside pressure on wages was hinted at earlier this week in the Fed's so-called 'Beige Book' summary of conditions in the U.S. economy.
"Across the country, contacts observed persistent labor market tightness and brisk demand for qualified workers," the report said. "Several districts reported continued worker shortages across most sectors."
Tech stocks could be rattled if jobs numbers are hot. Watch below.
That followed data from the Commerce Department on March 1 which showed the biggest jump in U.S inflation in more than a year, with the Fed's preferred PCE price index gauge accelerating 0.3% on the month while the so-called core index held at 1.5% on the year.
A tight labor market, coupled with rising wages, could bump the Fed's projections from three rate hikes this year to four, some economists have argued, as officials move to ensure that they're not "behind the curve" on inflation developments as they unwind trillions in government bonds purchased as part of the Fed's various quantitative easing programs.
However, President Donald Trump's decision to impose steep tariffs on non-American steel and aluminium has trimmed some of the market's expectations for Fed rate hikes as economists calculate the economic impact of reciprocal protectionist moves from officials in Europe and Asia.
The CME Group's FedWatch tool suggest a modest reduction in market expectations for rate hikes beyond March 21, when the FOMC is almost certain to hike by 0.25%, with June's probability falling to 69.2% from 70% and September slipping to 46% from 47.3%.
Dankse Bank analysts suggest Trump's "symbolic" tariffs likely won't have a major impact on inflation prospects even as the U.S. dollar weakens and growth moderately slows.
"While protectionism is bad for global risk sentiment (lower yields and equities), we think the market impact will be limited in our base case," the bank said. "We still think it is likely that Trump will go further, targeting China explicitly, as the US's largest trade deficit is with China but these measures are likely to be small in the bigger picture as well."