Friday's US jobs report just became all the more important for markets

Expectations for the timing of the first rate hike from the US Federal Reserve have shifted dramatically over the past four months.

At the start of 2015 it was seen as a near-certainty that the Fed would hike rates – most likely in June. Now, after a producing a raft of underwhelming data over the first quarter of 2015, those expectations have been slowly shifting backwards. September replaced June and then – following the disappointing Q1 GDP report – markets pushed the likelihood of a rate hike further out until December.

However, after hearing from two influential Fed officials last Friday, perhaps the likelihood of an earlier-than-expected rate hike from the Fed should be seen as far greater than what markets currently suggest.

Loretta Mester, Cleveland Fed president and 2015 non-voter, provided the strongest indication yet that a mid-year rate hike is still a strong possibility.

Here’s what she said following a speech in Philadelphia as reported by Reuters.

“All scheduled Fed policy meetings, including the next one, in June, are “on the table. There are a whole bunch of data releases that will come out between now and June. But to me the employment reports will be indicative of a lot.”

While not unusual from Mester – she is seen as one of the more hawkish members on the FOMC – adding credence to her belief that all upcoming meetings carry the potential for the Fed to lift rates, John Williams, San Francisco Fed president and someone seen closely aligned to Fed chair Janet Yellen, confirmed the views of Mester following a speech delivered late Friday.

“I agree with the way my colleague Loretta Mester put it,” Williams told Reuters following a speech at Chapman University, repeating Mester’s phrase that all meetings are “on the table”.

“Really positive data trends, improvement in the labour market, signs that improve the confidence and the expectation that inflation will move back to 2 percent – I mean could imagine that constellation of data coming in, whether before June or meetings right after that too,” Williams said. “But that would require the data to be good.”

Although just reaffirming the views expressed by Mester, the fact that it came from a FOMC centrist – someone who is neither overly dovish or hawkish – and 2015 voter is significant given current market expectations.

Based on his view, should upcoming data – particularly on the labour market – “be good” in the lead up to the June 16-17 FOMC meeting, the possibility of a rate hike at this meeting remains a reasonable possibility.

Given both Mester and Williams mentioned the labour market as something they would be watching closely in the months ahead, it means the scrutiny on Friday’s April non-farm payrolls report will be even greater than usual.

In March, the economy added just 129,000 net jobs, the lowest monthly total seen since December 2013.

Should, as was the case in 2013 and 2014, job growth accelerate in the months following, it suggests a strong result could see the potential for a near-term rate hike from the Fed increase significantly.

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