Greetings, forex friends! It’s a new month, which means another non-farm payrolls (NFP) report is coming our way this Friday at 1:30 pm GMT, which is very likely 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!
What happened last time?
- Oct. non-farm payrolls: +250K vs. +195K expected
- Sept. non-farm payrolls: downgraded from +134K to +118K expected
- Aug. non-farm payrolls: upgraded from +270K to +286K
- Jobless rate: steady at 3.7% as expected
- Labor force participation rate: 62.9% vs. 62.7% previous
- Average hourly earnings m/m: +0.2% as expected vs. +0.3% previous
The October NFP report revealed that the U.S. economy generated 250K non-farm jobs, beating expectations for a 195K increase.
The September reading did get downgraded from 134K to 118K, but this was fortunately offset by the August reading’s upgrade from 270K to 286K.
Looking at the other labor indicators, the jobless rate held steady at the 49-year low of 3.7% as expected.
However, the labor force participation rate jumped from 62.7% to a three-month high of 62.9%, which means that the U.S. economy was able to keep up with the influx of new and returning workers. And that’s good news for the U.S. economy.
Moving on to wage growth, that only printed a 0.2% month-on-month increase, which is slower than the previous month’s 0.3% rise. That’s not too bad, though, since the 0.2% increase is within expectations.
Overall, the October NFP report was very positive, so the Greenback jumped higher as a knee-jerk reaction and there was even some follow-through buying.
What’s expected this time?
- Non-farm payrolls: +198K expected vs. +250K previous
- Jobless rate: steady at 3.7% expected
- Average hourly earnings m/m: +0.3% expected vs. +0.2% previous
The consensus among most economists is that the U.S. economy generated around 198K non-farm jobs in November, which is still pretty solid but weaker compared to the 250K increase printed in October.
As for the other labor indicators, the jobless rate is expected to hold steady at 3.7%. Wage growth, meanwhile, is expected to pick up the pace since average hourly earnings are expected to rise by 0.3% after a 0.2% rise back in October.
So, what do the leading labor indicators have to say?
- Markit’s manufacturing PMI report found that “Firms registered a further rise in employment in November, with many noting that greater production requirements had prompted them to hire additional workers. The rate of job creation was sharp and the second-fastest in the year-to-date.”
- ISM’s manufacturing PMI report supports Markit’s findings since the employment sub-index jumped from 56.8 to 58.4.
- Markit’s service PMI report noted that “Greater business requirements pushed firms to increase employment at a solid rate. That said, the pace of job creation was the slowest since June 2017.”
- ISM’s non-manufacturing PMI report corroborates Markit’s findings since the employment sub-index fell 59.7 to 58.4.
- The ADP report revealed that private non-farm payrolls only increased by 179K, slowing down from October’s 225K increase.
What about historical tendencies? Do they offer additional insights?
Well, the consensus that jobs growth weakened in November doesn’t seem to be supported by historical data since there are more instances of stronger jobs growth in November.
Economists also apparently have a tendency to undershoot their guesstimates since there significantly more upside surprises over the years.
As for wage growth, there are slightly more instances where the November reading was stronger, which lend some support to the consensus.
As to how economists fared with their guesstimates, well, it’s a mixed bag, but we can see that there are more downside surprises than upside surprises.
To summarize, the available leading labor indicators are mixed since jobs growth strengthened in the manufacturing sector but weakened in the service sector.
The service sector does account for the bulk of jobs growth and overall employment in the U.S., however, so the available leading labor indicators seem to support the consensus that jobs growth weakened in November.
With that said, historical data show that jobs growth tends to be stronger in November, which obviously goes against the consensus.
Furthermore, historical data also show that economists tend to be too pessimistic with their guesstimates since there are significantly more upside surprises over the years. And that skews probability slightly more towards a potential downside surprise.
But as always, just keep in mind that we’re playing with probabilities here, so there’s always a chance that jobs growth may surprise to the downside instead.
As for wage growth, historical trends support the consensus for stronger wage growth in November, but there are more downside surprises than upside surprises over the years, so probability leans more towards a potential downside surprise for wage growth.
In any case, just remember that a better-than-expected reading for non-farm payrolls usually triggers a quick Greenback rally as a knee-jerk reaction. A miss, meanwhile, has the opposite effect.
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 tends to be limited as long as the reading is still 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.
However, we also have to take into account the fact that the market has been paying a lot of attention to U.S. bond yields because of the recent inversion of 5-year and 2-year U.S. bond yields, which sparked fears of a potential U.S. recession. So if bond yield slip because wage growth disappoints, then the Greenback is more likely to get dragged lower even if jobs growth exceeds 100K.
Anyhow, if news trading ain’t your thing or if high volatility makes you uncomfortable, then just remember that you always have the option to sit on the sidelines and wait for things to settle down.