Nonfarm Payrolls preview: Beware of the revisions

The monthly labour market report in the US will be released later today, and the market is expecting a decent reading for January of 175k, a slowdown after December’s bumper 256k reading. The unemployment rate is expected to stay at 4.1%, and average hourly earnings are set to moderate a notch to 3.8% from 3.9% at the end of 2024.

This report is expected to show that the US labour market is in good health, and although job openings are slowing, they fell from 8.15mn in November to 7.6mn in December, layoffs are not increasing. Thus, we expect today’s report to show that the labour market is stable, and the US economy is at full employment, which requires job creation of at least 150k a month.

Early indicators suggest strong jobs growth in January

Timelier indicators including the ISM services employment reading for January, rose last month to 52.3 from 51.4, and employment in the manufacturing sector also expanded according to ISM. Thus, the market is poised for another good month of labour market data.

Watch out for revisions

There is another dimension to this week’s report, as the annual revisions published by the BLS  will also take focus. There are revisions for the household and establishment surveys and are part of the BLS’s annual benchmarking process. The initial revisions were released in August, they showed 818k fewer jobs had been created between April 2023 and March 2024, compared to previous readings. This weighed heavily on the S&P 500, which fell more than 1% in the hour after the NFP report on 2nd August.

August revisions triggered a strong market backlash

The August revisions triggered a steep sell off in global stock markets and a spike in volatility, as investors saw this as a sign of US economic weakness. The market eventually recovered; however, stock market sentiment in the US has been shaky this year, and the impact of these revisions could have a big impact on market sentiment.

Population increase could weigh on labour market data

Analysts are expecting the revisions to show a large upward increase in the US population, to the tune of 3.5mn, which is expected to boost the size of the US labour market by 2.5mn people. The number of jobs created last year could be revised 700k lower for March 2024, which is a decline of 58k per month for the prior year, and there could be a further 234k downward revision to the household survey, which is used to create the unemployment rate.

The main takeaway from the revisions, is that they could be a sign that the labour market is softer than expected. This could help the disinflationary process in the US, and justify a faster pace of rate cuts from the Fed. There are currently less than 2 rate cuts priced in by the Fed for this year, and we will see if potential downward revisions to US jobs growth and upward revisions to the unemployment rate will shift the dial for market expectations this year.

The potential market impact

As we mentioned, the payrolls report can trigger a large market impact. This is mostly felt in the stock market, the currency market has a milder response to the NFP data. In the past 12 months, the dollar index has barely budged on average, in the 1 hour after the release. This is to be expected, since currencies are driven by a large variety of factors. However, it is worth watching the dollar today, especially since the revisions could impact the market’s view on what the Fed does later this year.

At the end of the week, the market is digesting some mixed tech results, and comments from  the new Treasury Secretary in the US, Scott Bessent, who said that he favours a strong dollar and will not altar the government’s debt issuance plans for this year. This is a rare bit of continuity from the new President’s administration, which could calm the markets at the end of this week.  It is worth noting that so far this week, European stocks are outperforming US stock indices, and the dollar is the second weakest currency in the G10 FX space, just behind the pound.

There is a lot of uncertainty around this jobs report, so we could see the markets react strongly before EOD Friday.