NFP Preview: Will a US jobs beat on low expectations sustain the dollar recovery?

Since the last official US jobs report was released in early September, the US dollar has bottomed out and begun a tentative recovery, gold topped out and initiated a sharp plunge, and equities have continued to gain ground in record high territory. That non-farm payrolls (NFP) data release in September, which reported August job growth, showed a gain of 156,000 jobs against a prior consensus forecast of around 180,000. While the actual number disappointed expectations, as did wage growth and the unemployment rate for August, it was still robust enough to sustain the strong employment trend from the previous two months. This time may be different.

Current NFP Expectations

On Friday, the new jobs data for September will be reported, and due to the substantially adverse effect of recent hurricanes (Harvey and Irma) on the US economy, it is widely expected that September’s job growth was negatively impacted. The extent of that impact, however, is not clear, and current expectations for the outcome run anywhere from a low of 80,000 jobs added in September all the way up to 110,000. A Reuters poll places the consensus around 90,000. The September unemployment rate is expected to have remained steady from the previous month at 4.4%, while average hourly earnings are expected to have increased by 0.3% against the previous month’s worse-than-expected showing of 0.1% wage growth.

The low expectations for the NFP headline data may well have overestimated the impact of the recent storms. If this is indeed the case, then a better-than-expected showing on Friday could be in store for the markets, which may sustain the US dollar’s recent recovery. Any such jobs beat would help support the Federal Reserve’s current policy trajectory towards higher interest rates, and possibly increase the already-high market expectations for a December rate hike by the Fed. Supporting a better-than-expected showing for the non-farm payrolls report on Friday have been key employment-related data releases this week, including the ADP private employment report as well as the ISM manufacturing and non-manufacturing PMI employment components.

Jobs Data Preceding NFP

Wednesday’s ADP data came out modestly better than expected at 135,000 private jobs added in September against previous forecasts of around 130,000 (which also took into consideration the two hurricanes’ impact). This relatively strong ADP reading despite the recent storms bodes well for Friday’s official data and suggests that low-end NFP forecasts may have overestimated the damage done to job growth in September. Although the ADP report is not necessarily a very accurate pre-indicator of the official NFP jobs data from the US Labor Department – and sometimes even misses the mark dramatically – it does help provide a useful guideline when used in conjunction with other employment-related data.

One of the most important of these other indicators is the ISM non-manufacturing (services) PMI employment component, which showed an even faster pace of job growth at 56.8 in September than in August (56.2). In addition, manufacturing PMI employment also grew faster in September at 60.3 against August’s 59.9.

Finally, September’s weekly jobless claims have all been better (lower) than expected, and have remained very low overall from a historic perspective.

Forecast and Potential Market Reaction

Despite severe hurricanes that are widely expected to have hit US job growth in September, it is likely that the economic damage may have been overestimated with respect to Friday’s jobs data. This should especially be the case since other key employment-related data suggest that September job growth may have been more resilient than expected. With consensus expectations ranging primarily between 80,000-90,000 jobs added in September, our target range is 120,000-140,000. Any result falling within this range or higher is likely to further boost a US dollar that has already been in recovery mode for the past four weeks. An outcome below 80,000 is improbable, so if that does occur, the dollar could be dragged down sharply. Between 80,000-120,000, the market reaction becomes less clear. If that is indeed the case, any strongly-defined market move would be unlikely, as the added uncertainty of forecasting the weather-related impact may peg September as an anomaly with little value in providing any guidance for the dollar.

NFP Jobs Created and Potential USD Reaction

> 160,000
Strongly Bullish

141,000-160,000
Bullish

120,000-140,000
Moderately Bullish

80,000-119,000
Neutral

< 80,000
Bearish