Nonfarm Payrolls preview: Will it change the dial for the Fed?

The much-anticipated non-farm payrolls report will be released on Friday at 1330 BST. The market is expecting an increase of 214k for March. This is slightly lower than the 275k jobs growth for February. As always with payrolls, it is not just the payrolls figure that matters for the Fed. The unemployment rate and earnings data are also key.

The unemployment rate is expected to decline slightly to 3.8% from 3.9% in February, and average hourly earnings are expected to rise by 0.3% last month and increase by 4.1% on an annual basis. Overall, this data suggests that the labour market in the US is robust, jobs growth is strong and average earnings are rising at an annual rate double the Fed’s target rate for inflation. If we only analysed this data, then it would be hard to justify the Fed hiking rates. However, there is a wider ecosystem of labour market data that the Fed looks at, and this is worth investigating in more detail.

The tale of two surveys

Firstly, Friday’s labour market report includes two surveys of labour market data: the establishment survey and the household survey. The primary difference is that the household survey measures a sample of households, while the establishment survey measures responses from businesses. The household survey produces the unemployment rate, and the establishment survey measures NFPs. The main difference in the two surveys’ methods is that the household survey has no duplication of individuals, even if someone has multiple jobs. However, the establishment survey counts each job separately, so an individual could be counted multiple times if they have more than one job. The difference in method does not make one better than the other, but it does mean that sometimes they are giving different signals.

The increasing number of unemployed should be watched

The NFP reports have been strong, and the average number of payrolls per month over the last year is 230k, which suggests that the US labour market is strong. However, the establishment survey tells a different story. The unemployment rate rose by 0.2% in March to 3.9%. The number of unemployed people rose by 334,000 to 6.5 million unemployed people in total in the US. A year ago, the number of unemployed people was 6 million. This is a large increase and suggests that there is slack in the labour market.

It is fairly common for the household and establishment surveys to give different views on the US labour market, but some prefer the household survey as it only counts individuals once and tends to have fewer revisions than NFPs.

The bigger picture for the labour market

As things stand, the NFP report is flashing hot, but other labor market signals are turning lower. For example, the latest initial jobless claims report was at its highest level since September last year. The ISM Manufacturing employment index remains in contraction territory at 47.4, and the service sector employment index also looks to be contracting. The ISM service sector employment index for March was 48.5, well below the average of the last 12 months.

The NFP report is considered the A-list of labour market data that is watched closely by the Fed. The chair, Jerome Powell, has focused more on labour market data of late than the inflation rate, so Friday’s report is a must-watch.

Payrolls: The market impact

It is unclear if the household survey leads the establishment survey, so the difference between the two is one to watch. If the payrolls report does come in weaker, we may see tech stocks rally further, as they tend to benefit the most from rate cuts, and some tech companies also have large balance sheets that could protect them from an economic downturn. It may also cause bond yields to rally, and it could erode support for the dollar. The dollar index rose to a 5-month high on Monday, but since then it has sold off. If we get a weaker labour market report then the dollar may continue on this downtrend, however, a strong reading could see it bounce back.

What Payrolls could mean for the Fed?

Overall, this is one data print that we know the Fed will be watching closely, and it has the potential to shift the dial for the timing of Fed rate cuts. However, as we have shown, there are some conflicting indicators right now, which suggest that the labor market is not as strong as the headline data makes it look. The labour market picture is murky, which makes it difficult to predict the exact timing of rate cuts from the Fed. Either way, even if payrolls are strong for March, there is still a chance of a summer rate cut from the Fed.