Greetings, forex friends! It’s a new month, which means another non-farm payrolls (NFP) report is coming our way this Friday (Dec.8, 1:30 pm GMT) to give the Greenback a volatility injection.
And if you need to read up on what happened last time and what’s expected this time, then today’s edition of my Event Preview will help you out!
By the way, this is the final jobs report before next week’s FOMC statement and an expected Fed rate hike, so it’s very likely that rate hike expectations are riding on this Friday’s NFP report.
What happened last time?
- Oct. non-farm payrolls: +261K vs. +312K expected
- Sept. non-farm payrolls: upgraded from -33K to +18K
- Aug. non-farm payrolls: upgraded from +169K to +208K
- Average hourly earnings m/m: 0.0% vs. 0.2% expected, 0.5% previous
- Jobless rate: downtick to 4.1% vs. steady at 4.2% previous
- Labor force participation rate: 62.7% vs 63.1% previous
The U.S. economy only generated 261K non-farm jobs in October, missing expectations for a 312K increase.
But on a more upbeat note, jobs growth in September was upgraded from -33K to +18K. In addition, jobs growth for August was also revised higher from +169K to +208K.
All those revisions mean that non-farm jobs increased by 90K more than originally estimated, which is great news. And that certainly took away some of the disappoint from October’s reading.
Looking at the other labor indicators, the jobless rate ticked lower from 4.2% to 4.1%. This is the best reading since December 2000!
However, it’s kinda disappointing that the downtick was partially due to the labor force participation rate sliding from 63.1% to a five-month low of 62.7%.
Moving on to wage growth, that was a disappointing because it was flat month-on-month during the October period (+0.5% previous), missing expectations that earnings would rise further by 0.2%.
Year-on-year, this translates to a rise of 2.4% (2.8% previous), which is the weakest reading since February 2016.
In summary, non-farm payrolls missed expectations in October, which is why the Greenback’s knee-jerk reaction was to drop across the board. However, the October jobs report was actually mixed as a whole, which is likely why there was no follow-through selling.
And since the mixed NFP report was followed by better-than-expected readings for U.S. factory orders and ISM’s non-manufacturing PMI , bulls ended up having the advantage and so the Greenback was able to recover from the bearish knee-jerk reaction to the NFP report.
What’s expected this time?
- Non-farm payrolls: +210K vs. +261K previous
- Jobless rate: steady at 4.1% expected
- Average hourly earnings m/m: 0.3% expected vs. 0.0% previous
For the month of November, most economists forecast that around 210K non-farm jobs were created, so economists think that jobs growth was still relatively solid but slower compared October.
As for the other labor indicators, the jobless rate is expected to hold steady at 4.1%. Wage growth, meanwhile, is expected to pick up the pace since average hourly earnings are expected to rise by 0.3% after flattening out previously.
Okay, so what do our available leading labor indicators have to say?
- Markit’s manufacturing PMI report noted that payrolls “grew at the second-strongest rate seen since June 2015 in November.”
- Markit’s services PMI report, meanwhile, highlighted that “Job creation accelerated slightly to a solid rate that was the fastest in three months.”
- ISM’s manufacturing PMI report’s employment index eased very slightly from 59.8 to 59.7.
- As for ISM’s non-manufacturing PMI report’s employment index, it fell from 57.5 to 55.3. The reading is still well above the 50.0 stagnant level, so employment still grew, albeit at a weaker pace.
The available leading indicators all point to solid jobs growth in November. However, they’re sending conflicting signals since Markit’s findings point to an acceleration in jobs growth while ISM’s employment indices hint at slower jobs growth .
Okay, let’s take a look at historical tendencies now. And, well, ISM’s employment indices and the general consensus that jobs growth slowed (but still solid) in November appears to have a historical basis, as we can see below (red is worse, green is better).
However, economists also have a historical tendency to be too pessimistic and undershoot their guesstimates, resulting in far more upside surprises.
With regard to the jobless rate, meanwhile, there is a historical tendency for the jobless rate in November to be lower compared to October. Also, the actual reading has a tendency to beat expectations.
As for wage growth, there are no clear historical tendencies for us to take advantage of, which is kinda sad.
To summarize, the available leading indicators hint at another solid increase in jobs. However, they’re mixed in that Markit is pointing to stronger jobs growth while ISM is hinting at a weaker jobs growth, which also happens to be the general consensus among economists.
Regardless, probability for both non-farm payrolls and the jobless rate appear to be skewed more towards an upside surprise, given the strong historical tendencies. As always, however, it must be pointed out that we’re playing with probabilities here, so there’s no guarantee that the actual readings will be better-than-expected.
In any case, just remember that a better-than-expected reading for non-farm payrolls triggers a quick Greenback rally as a knee-jerk reaction.
A miss, meanwhile, has the opposite effect. And the Greenback’s knee-jerk reaction to the October jobs report is a classic example of this. As for follow-through buying or selling, that usually depends on the details of the jobs report, with wage growth usually (but not always) the determining factor because of its more direct link to consumer spending and inflation.
Also, it’s worth noting that even if non-farm payrolls miss expectations, follow-through selling pressure tends to be limited as long as the reading is till above 100K, which is the minimum number of jobs needed per month to keep up with working-age population growth, as well as keep rate hike expectations alive.