On Friday, the official US jobs data for October will be reported, and expectations for a sharp bounce-back from September’s weather-related negative reading are high. Last month, data for September showed a loss of 33,000 jobs, the first negative outcome in seven years, due in large part to the impact of hurricanes on food services and drinking establishments. That surprise reading, released in early October, helped contribute to a pullback for the US dollar, which had been in the process of beginning a recovery from multi-year lows.

Since that report last month, the dollar has rebounded and extended its recovery, mostly on increasing anticipation of: higher interest rates from the Federal Reserve, a new Fed chair to be appointed by President Trump, and the long-awaited introduction of US tax reform policy (the first steps of which were taken on Thursday with the release of a tax plan by the US House of Representatives).

On Wednesday, the Fed issued its November policy decision and statement, essentially leaving all aspects of monetary policy unchanged. In the statement, the Fed reported that “the labor market has continued to strengthen and ... economic activity has been rising at a solid rate despite hurricane-related disruptions.” Though no policy changes were made, the Fed essentially confirmed its expected path towards tighter monetary policy, including balance sheet normalization and the likelihood of a December interest rate hike. The US dollar received a modest boost as a result.

Current NFP Expectations

The consensus expectations for Friday’s non-farm payrolls data are currently running slightly higher than 300,000 jobs added in October, the highest monthly forecast in over seven years. Clearly, markets are very optimistic in expecting such an aggressive bounce-back in employment data. The October unemployment rate is expected to have remained low and steady from the previous month at 4.2%, while average hourly earnings are expected to have increased by 0.2% against the previous month’s better-than-expected showing of 0.5% wage growth.

With such high expectations for the headline job creation data, it will clearly be easier for the actual outcome to disappoint. However, even if the numbers fall somewhat short of expectations, which is a distinct possibility, any negative impact on the US dollar is likely to be limited. Conversely, if the reading actually beats the high expectations, which would help support the Fed’s current policy trajectory towards higher interest rates, a positive dollar impact is likely to be pronounced. In that event, the current dollar recovery may well be extended significantly further.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have been somewhat mixed, but have still shown solid employment growth overall. These releases include October’s ADP private employment report, the ISM manufacturing PMI employment component, and weekly jobless claims data throughout October.

Wednesday’s ADP data came out substantially better than expected at 235,000 private jobs added in October against prior forecasts of around 200,000. While this strong ADP reading bodes well for Friday’s official data, whether the official NFP data beats its significantly higher forecast remains to be seen. 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 manufacturing PMI employment component, which showed solid manufacturing sector job growth at 59.8 in October, albeit slightly slower than September’s 60.3. The even more critical ISM non-manufacturing (services) PMI will be released after Friday’s NFP data, so will not be considered as a pre-NFP input.

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

Forecast and Potential USD Reaction

With lofty consensus expectations of over 300,000 jobs added in October, our target range is somewhat less aggressive at around 270,000-300,000, given the pre-NFP data inputs. Any result falling above this range is likely to give the US dollar a substantial boost, potentially helping to extend its recent recovery. An outcome falling within or around the range is unlikely to make much of an impact on the dollar. If the actual data falls well below our target range, however, the dollar could see a significant pullback after its recent rally.

> 320,000
Strongly Bullish

301,000-320,000
Moderately Bullish

270,000-300,000
Neutral

240,000-269,000
Moderately Bearish

< 240,000
Bearish

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