Today’s NFP release has greater significance than usual as it comes less than a week before a key monetary policy meeting from the Federal Reserve. Next Wednesday the Fed is expected to raise rates by an additional 25 basis points to take its headline fed funds rate up to a band between 1.25 and 1.50%. If it does, then it take the fed funds rate to its highest level in over nine years.
The market assigns a 90% probability of the Fed hiking next week. Consequently, it’s unlikely that a poor payroll number would throw the central bank off track. However, a disappointing jobs report together with lower-than-expected Average Hourly Earnings (which would weigh on inflation) could see the Fed row back from its forecasts for a further three 25 basis point rate hikes throughout 2018. This should weigh on the dollar, although it may prove to be yet another excuse to buy US stocks indices, banking sector excluded.
The consensus expectation is for November Non-Farm Payrolls to rise 198,000. This would represent a significant fall from the prior month’s reading of 261,000 which was itself well below the consensus forecast of a 312,000 increase. However, last month there were upward revisions to previous releases totalling 90,000 as the data counts were complicated by disruptions caused by summer hurricanes. Nevertheless, payrolls of 200,000 or thereabouts (revisions excepted) would keep the 6-month rolling average around 180,000 and should prove positive for equities and the dollar. Conversely, if payrolls come in below 180,00 and there’s no offsetting revision to prior data then we should expect the dollar to sell off – at least short-term.
Analysts will also be paying close attention to wage growth, particularly given the Fed’s concerns that inflation as measured by Core PCE is, at +1.4% year-on-year, running well below its 2% target. Average Hourly Earnings were unchanged in October from the prior month, disappointing forecasters who had been looking for a 0.2% increase. This month the expectation is that hourly earnings will rise 0.3%. A downside miss would increase speculation that the Fed could slow its proposed pace of monetary tightening in 2018. This is also something that could weigh on the dollar, other factors being equal.
Finally, there’s the Unemployment Rate itself. Last month it dropped to 4.1% hitting its lowest level since January 2001. However, this came as a record number of US citizens of working age (95.4 million) have now dropped out of the labour force. If they’re not looking for work, then they don’t count as unemployed. The November Unemployment Rate is expected to be unchanged from the previous month, but a surprise here in either direction is unlikely to be market-moving.
So, as always there are a lot of moving parts to consider with the likelihood of a pick-up in volatility after the release - in FX if not in equities. But what’s key is to look behind the headline numbers as revisions to prior data could see the initial market move fade rapidly.
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