The November NFP report sent a mixed signal, so the Greenback, unfortunately, didn’t get a major volatility infusion.
What happened? And did the November NFP report affect rate hike expectations?
Well, if you need a brief run-through on the important details, as well as how the NFP report affects rate hike expectations, then today’s review may be just what you need.
4th miss in employment
- November non-farm payrolls: 178K vs. 180K expected
- October non-farm payrolls: downgraded from 161K to 142K
- September non-farm payrolls: upgraded from 191K to 208K
In my Forex Preview for the November NFP report, I concluded that:
“Overall, the available leading indicators seem to be leaning towards a bigger increase in non-farm employment, so the consensus reading seems about right, with chance skewed more towards an upside surprise.”
Well, we, unfortunately, didn’t get an upside surprise, but non-farm employment in November did see a bigger increase when compared to October. To be more specific, the seasonally-adjusted reading came in at 178K, barely missing the +180K consensus, but better than October’s downwardly revised +142K reading (+161K originally).
This is the fourth consecutive miss in non-farm employment, though. But on a more upbeat note, the November reading is still above the 100K needed to keep up with working-age population growth. In addition, the reading for September was revised higher from 191K to 208K.
However, if we take September’s upgrade and October’s downgrade, we still get a net loss of 2K jobs, so the U.S. economy generated fewer jobs than originally expected, which is a real bummer.
As for the breakdown, the service sector continued to generate the bulk of the jobs, although it is a bit disappointing that the higher-paying information industry continues to shed jobs.
Manufacturing, meanwhile, continues to lose jobs as a whole, especially the higher-paying durable goods manufacturing sector.
And interestingly enough, the government added 22K jobs in November, which certainly helped to prop up the employment numbers.
- Average hourly earnings m/m: -0.1% vs. 0.2% expected, 0.4% previous
- Average hourly earnings y/y: 2.5% vs. 2.8% previous
Employment was a miss, but wage growth was an even bigger miss since average hourly earnings contracted by 0.1% month-on-month (-0.12% or -$0.03 to $25.89 to be more exact) when it was expected to grow at a weaker 0.2% rate.
Year-on-year, this translates to a 2.5% rate of expansion, a disappointing slowdown from October’s seven-and-a-half-year high of +2.8%.
Looking at the details of the NFP report, the fall in wages was broad-based, with only retail trade, transportation and warehousing, and financial activities reporting increases.
The biggest drag came from manufacturing, which saw wages drop by 0.61% or $0.16 to $26.19. Durable goods manufacturing got the worst of it, with wages falling by 0.72% or $0.20 to $27.43.
Non-durable goods manufacturing, meanwhile, suffered a decline of 0.33% or $0.08 to $24.06. The manufacturing sector accounts for around 8.45% of total employment, with durable goods contributing 5.28% and non-durable goods the remaining 3.17%.
Another major drag was education and health services, which saw wages slide by 0.19% or $0.05 to $25.87. The drop is not as big compared to manufacturing, but education and health services do account for a hefty 15.78% of total employment.
And as you may have noticed in the table earlier, educational services provided 9.2K in November while health care added 34.7K jobs, so they also provided a large chunk of job gains in November.
Jobless rate improved (again), but…
- Jobless rate: dropped to 4.6% vs. steady at 4.9% expected
- Labor force participation rate: ticked lower to 62.7% vs. steady at 62.8% expected
The jobless rate improved from 4.9% to 4.6%, which is a low not seen since August 2007. However, not everything is as great as it seems.
True, the number of employed persons increased by 160K to 152,085K while the number of unemployed persons fell by 387K to 7,400K.
But you see, the labor force also shrank by 226K while the total number of Americans not in the labor force ballooned by 446K to a record high of 95,055K.
This implies that the U.S. economy was not able to generate enough jobs and many unemployed Americans just called it quits and left the labor force.
This caused the labor force participation rate to worsen from 62.8% to 62.7%. And this drop in the participation rate, in turn, helped to bring down the jobless rate.
The November NFP report was a downer overall, which is why the initial knee-jerk reaction was to dump the Greenback.
In terms of rate hike expectations, however, it cemented the idea of a December rate hike. After all the 178K reading may have been a miss, but it’s still way above the 100K “floor” that many Fed officials have their eyes on.
One good proof of this improved rate hike expectation is the CME Group’s FedWatch Tool.
And as you can see below, the probability of a December rate hike jumped from 92.7% to 97.2% in the wake of the NFP report.
As such, the bulls tried to buy up the Greenback after the initial dip. Unfortunately for Greenback bulls, the second straight month of worsening participation rate and the fall in wages likely dampened expectations for future rate hikes.
And as you can see in the FedWatch Tool, the probability that the Fed will have a follow-up rate hike in February 2017 fell from 5.2% to 3.6%.
And more traders were probably trying to price in the lower probability of future rate hikes since the Greenback grudgingly weakened against its peers after the initial tussle.