NFP to Have Last Say on September Rate Hike

The August non farm payrolls (NFP) employment report will be released two weeks before the Federal Reserve’s September Federal Open Market Committee (FOMC) meeting. The Fed has stressed the importance of “data dependency” in their decision to raise interest rates and after deciding against a June rate hike September became the next likely candidate. The case for a rate hike continues to be mixed with strong employment and positive revisions to the first quarter gross domestic product (GDP) to balance struggling internal demand and consumer spending. Global markets have shown how vulnerable they are as the China stock market rout raised doubts about the effects of a Chinese slowdown with a global impact.

Fed officials have commented that the events in China would not alter the American central bank’s timing but a closer to home indicator might. Employment has been the strongest pillar in the U.S. growth recovery, but historically August tends to underperform on the date the data is published only to be revised upwards down the line.

The non farm payroll report (NFP) will be published at 8:30 am on Friday, September 4. The U.S. economy has managed to record above 200,000 gains since the release on May 8 and an equal healthy figure is expected on Friday. The report will be heavily analyzed for signs of a strong recovery in all the components of employment and not just the top headline numbers like the unemployment rate and number of jobs. The quality of the jobs and the wage components should be more telling and could drive the USD higher. On the other hand a disappointing or mixed report will do the dollar no favors as if employment falters then the September rate hike will be off the table and the market will punish the USD.

ADP non farm employment came in lower than expected at 190,000. The analyst’s forecast was for a gain of 204,000. This month’s private payroll report was an improvement over July’s figures of 185,000 new jobs. Small business continue to lead the way in the number of new jobs added with 85,000. This contrasts with a decrease fro companies with more than 500 employees which added only 40,000 positions. Given that the ADP looks at a different pool than the one the U.S. government uses to generate the NFP there is no direct correlation between the two reports. That being said the trend of a small business led recovery is obvious in both.

U.S. unemployment claims showed a slight increase at 282,000 from the previous weekly figure of 270,000. The estimate from market watchers was for a total of 275,000. The underlying employment trend is still strong as it has managed to stay below 300,000 for 23 weeks in a row.

Reuters published an analysis of the past 10 year data and in a development that complicates the probability of the Federal Reserve announcing a rate hike in September, the NFP data in August tends to be weaker, with a likely upwards revision a month later. On average 58,000 more jobs were added after the deadline as companies turned in their questionnaires late.

Employment continues to be the strongest pillar of the U.S. recovery. Growth has stumbled with a horrible first quarter that has now been revised to just a bad one, but still the Fed waits. The June Federal Open Market Committee (FOMC) meeting was the most likely candidate, but the U.S. economy did not seem ready by the Fed’s estimations to handle a higher interest rate. The Fed faces a missing the perfect window for a rate hike if it hasn’t done so already. Employment cannot continue improving at the same rate until it hits a wall as on paper full employment should be around the corner. Macro headwinds such as those out of Europe, and now China have already delayed the Fed’s decision to hike rates in June and with August’s tendency to underperform due to timing issues September is probably off as well.

Employment events to watch this week:

Friday, Sep 4
8:10am USD FOMC Member Lacker Speaks
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change
10:00am CAD Ivey PMI