NFP Preview: Will November US jobs data extend the dollar rebound?

The official US jobs data for November will be reported on Friday morning by the US Department of Labor, and consensus expectations are pointing to a likely continuation of the strong job creation that has prevailed through much of the year (earlier weather disruptions notwithstanding). Around 200,000 non-farm jobs are expected to have been added to the US economy in November following a solid showing of 261,000 jobs added in October, which helped compensate for September’s hurricane-related hit to employment growth.

In the run-up to Friday’s jobs release, the US dollar has mostly been in rebound mode after stumbling in the latter half of November. The dollar’s recent rise has largely been attributed to mounting anticipation that US tax reform may potentially come to fruition by the end of the year, as well as expectations that the US Federal Reserve will very likely raise interest rates by 25 basis points in its heavily anticipated December FOMC meeting next week. Market expectations of such a rate hike as measured by the Fed Funds futures markets have remained at or close to 100% for many weeks now. Next week, markets will be looking primarily for any clues as to the future path of monetary policy that may be gleaned from the Fed’s statement, press conference, and economic projections.

While Friday’s jobs data outcome is unlikely to make very much of an impact, if any, on next week’s Fed decision (unless there is an exceptionally negative deviation from expectations), the current and ongoing employment landscape will be critical to the Fed’s policy path going forward into 2018, and will therefore impact the US dollar. Likewise, this impact on the dollar will also affect gold prices, which have dropped sharply in the run-up to the non-farm payrolls data, as the dollar has strengthened, anticipation of higher interest rates has increased, and demand for safe-haven assets like gold has generally remained subdued.

Current NFP Expectations

As noted, the consensus expectations for Friday’s headline non-farm payrolls data point to around 200,000 jobs added in November. The November unemployment rate is expected to have remained low and steady from the previous month at 4.1%, while average hourly earnings are expected to have increased by 0.3% after the previous month’s flat reading.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have continued to show solid employment growth overall, though some of November’s data fell modestly short of the previous month. These releases include November’s ADP private employment report, the ISM manufacturing and non-manufacturing PMI employment components, and weekly jobless claims data throughout November.

Wednesday’s ADP data came out essentially as expected at a very solid 190,000 private jobs added in November. 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 expanding job growth in the critical services sector at 55.3 in November, albeit slower than October’s 57.5 reading. For the manufacturing sector, the ISM manufacturing PMI employment component also showed expanding job growth at 59.7 in November, which was little-changed from October’s 59.8 reading.

Finally, November’s weekly jobless claims have all come out relatively close to expectations, and have mostly remained exceptionally low overall from a historic perspective.

Forecast and Potential Reaction

As previously mentioned, Friday’s jobs data is unlikely to make a very large impact on the Fed’s December decision or the US dollar unless there is a substantially negative deviation from expectations. Therefore, any outcome at or higher than forecast could further boost the dollar and weigh on gold, but the market reaction would unlikely be sizeable. In contrast, any major disappointment in the jobs data has the potential to adversely affect the Fed’s rate decision next week and into 2018, in which case the dollar could take a substantial hit.

With expectations around 200,000 jobs added in November, our target range falls closely in-line with consensus at around 180,000-200,000, given the pre-NFP data inputs. Any result falling within or above this range is likely to give the US dollar a modest boost, as it would help confirm the Fed’s path to higher interest rates. An outcome falling somewhat below the range, in contrast, would likely hit the dollar. Finally, any reading that falls well below the range could make a strong negative impact on the dollar.

NFP Jobs Created and Expected USD Reaction

> 230,000
Bullish

201,000-230,000
Slightly Bullish

180,000-200,000
Neutral

150,000-179,000
Bearish

< 150,000
Strongly Bearish