A Review of the August NFP Report

If you want a quick run-through on the details of the August NFP report, as well as the possible reason for the Greenback’s wonky price action, then this quick review may be just what you need.

Downside “surprise” for employment

  • August non-farm payrolls: 151K vs. 180K expected
  • July non-farm payrolls: upgraded from 255K to 275K
  • June non-farm payrolls: downgraded from 292K to 271K

I concluded in my Forex Preview for the August NFP report that “chance seems to be skewed more towards a possible downside surprise.” I also noted in that write-up that “payroll numbers for the August period tend to be lower due to seasonal adjustments.” And I also added that “the actual seasonally-adjusted reading tends to miss expectations.”

Well, this year’s August NFP report maintained the time-honored tradition of missing expectations by coming in at 151K, a downside “surprise” from the 180K consensus.

August NFP: Expected vs. Actual

This year’s seasonally-adjusted reading was also lower than the unadjusted reading, which is also in keeping with tradition.

August NFP: Unadjusted vs. Adjusted

On a more upbeat note, the reading for July was upgraded from 255K to 275K. But on a more downbeat note, the reading for June was downgraded from 292K to 271K, giving us a net loss of 1K jobs from all those revisions.

Slower earnings growth

  • Average hourly earnings m/m: 0.1% vs. 0.2% expected, 0.3% previous
  • Average hourly earnings y/y: 2.4% vs. 2.7% previous

Average hourly earnings increased by 0.1% month-on-month, which is slower than the expected 0.2% increase and much slower than the previous month’s +0.3%. On a year-on-year basis, this translates to a pace of +2.4%, which is slower than the previous month’s annual pace of +2.7%.

The slower increase in earnings was likely due to the loss of higher-paying jobs, as well as the large contribution in job gains from lower-paying industries.

If you look at the table below, the higher-paying durable goods manufacturing sector lost a total of 15.4K jobs. The loss of 6.4K jobs from the transportation equipment industry (aerospace engineers, mechanical engineers, machinists, etc.) is particularly noteworthy, since that industry is on the higher end of the earnings scale, with an average hourly earnings of $30.40. For reference, the average hourly earnings for all industries in August was $25.73.

August NFP: Durable Goods Manufacturing

Moving on, if you look at the table for the non-durable goods manufacturing sector below, you’ll see that most of the job gains came from the food manufacturing industry. Unfortunately, this industry is on the lower end inn terms of earnings ($19.78).

August NFP: Non-Durable Goods Manufacturing

As for the service sector, it continued to generate jobs, but a large chunk of the jobs generated came from lower-paying industries, such as retail trade ($17.92), warehousing and storage ($19.04), social assistance ($15.92), and accommodation and food services ($13.90).

August NFP: Services

Jobless rate steady

  • Jobless rate: steady at 4.9% vs. tick lower to 4.8% expected
  • Labor force participation rate: steady at 62.8%

The jobless rate held steady at 4.9%, missing expectations that it would tick lower to 4.8%. The details of the jobs report don’t really give anything to write home about since the labor force participation rate was maintained at 62.8%. There wasn’t therefore really anything good or bad about the jobless rate, other than missing expectations of a downtick of course.

Final Thoughts

The August NFP report missed expectations across the board, which is why the Greenback also slumped across the board as a very profitable knee-jerk reaction.

USD Index 15-Minute Forex Chart

USD Index 15-Minute Forex Chart

But as you can see on the chart above, the Greenback began getting buyers and was soon able to recover against most of its forex rivals (and then some). Although it did have difficulty against the pound and continued to lose to the Loonie. Anyhow, what’s up with the rebound?

A likely clue for this wonky price action comes from the CME Group’s FedWatch Tool. And as you can see below, the NFP report caused the probability of a September rate hike to drop to 21% from 24% the day before.

September Meeting Probabilities

September Meeting Probabilities

Likewise, the probability of a November rate hike dropped from 30.3% to just 25.9%. But as you can see below, the probability of a December rate hike actually improved from 53.6% to 54.2%.

December Meeting Probabilities

December Meeting Probabilities

Wait, what? This is madness! This is Sparta! But all kidding aside, the market’s conflicting views on rate hike probabilities are actually in-line with most of the big banks.

But how can the NFP report be bad for September and November rate hike expectations while being good for December rate hike expectations?

The lower rate hike expectations for the September and November meetings were likely due to the worse-than-expected slowdown in wage growth, since the steady jobless rate was actually quite neutral, other than missing expectations of a downtick of course.

As for the improved rate hike expectations for December, I said in my Forex Preview that “an actual reading above 100K would probably be good enough” because as Fed Head Yellen said last December, “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month.”

I also quoted Atlanta Fed President Dennis Lockhart as saying that a non-farm employment of around 150K would be “very encouraging.” And as it turns out, the actual reading came in at 151K. So even though it missed expectations, the reading is still “very encouraging” from the perspective of some Fed officials. Hence, the market is optimistic that the Fed is still likely on track for a December rate hike.

It also probably helped that Richmond Fed President Jeffrey Lacker said after the NFP report was released that the reading for August is “reasonably strong, given that it came in above a rate you would need to keep up with working-age population growth.” Lacker also said that “It appears that the funds rate should be significantly higher than it is now.” It should be noted that Lacker is a not a voting FOMC member this year, though, so his hiking bias doesn’t really have a lot of substance behind it.

Anyhow, it would be interesting to see whether or not the market will maintain its views next week, especially if more Fed officials come out to share their views. But how about you? Did the August NFP report erode your expectations for a September rate hike? Or do you  still think that a September rate hike is in the cards?

 


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