PREVIEW: NOVEMBER US NONFARM PAYROLLS
- US Change in Nonfarm Payrolls (Nov) M/M Exp. 200K (Low 130K, High 275K), Prev. 271K, Sep. 142K
- US Unemployment Rate (Nov) M/M Exp. 5.0% (Low 4.9%, High 5.3%), Prev. 5.0%, Sep. 5.1%
- US Average Hourly Earnings (Nov) M/M Exp. 0.2% (Low 0.1%, High 0.4%), Prev. 0.4%, Sep. 0.0%
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November’s NFP release is in strong focus after the stellar reading in October which saw the largest increase this year at 271K additions. Additionally, unemployment is expecting to remain at 5% which will maintain the reading at the lowest level since Apr’08. Furthermore, average hourly earnings are typically in focus due to being a key indicator of wage inflation for the Fed. As we head into the final reading before the highly anticipated December FOMC meeting, FFR futures are currently pricing in a 74% chance that the Fed are to increase interest rates. Recent commentary from Fed officials has been typically non-committal. This week, Fed’s Evans (Voter, Dove) reiterated that the path of rate lift-off was more important than the timing yet is nervous at the thought of an increase in rates in December but is approaching the meeting with an open mind. Fed Chair Yellen stated on Wednesday that delaying lift off for a significant period could cause the risk of steeper tightening at a later date and labour market improvements have improved her confidence in the inflation target. These were interpreted as marginally hawkish by the market, helping to solidify expectations of a rate hike at the upcoming meeting.
In terms of the recent labour data, Wednesday’s ADP release saw a beat on expectations at 217K vs. Exp. 190K (Prev. 182K) with an upward revision to 196K. Furthermore, even though this week’s ISM manufacturing data was largely disappointing, the ISM Employment Index came in at 51.3 vs. Exp. 48.4 (Prev. 47.6). Furthermore, the US Chicago Purchasing Manager (Nov) M/M missed expectations at 48.7 vs. Exp. 54 (Prev. 56.2) yet again we saw the employment component grow at a faster rate during the month. Finally, the employment component of ISM non-manufacturing missed expectations at 55.0 vs. Prev. 59.2 in contrast to the manufacturing release earlier in the week.
Given the strong ADP release, individuals are looking for a second strong reading in a row which will cement uncertainty in the labour market, illustrating that it is recovering, and shaking off some of the more disappointing reports in the fall. Furthermore, participants have stated that policy makers will not solely look at one data point even though importance is placed on this release. Analysts go on to state that it will require a combination of a poor November reading alongside downward revisions to both September and October to cause the Fed to raise questions over labour market momentum. In terms of potential figures, a three month average less than 150k would cause some concern for the Fed but this would require the November report to print sub 50k to fall below 150k with the current average at 187k.
Market Reaction
In the final reading ahead of the FOMC rate decision on the 16th December, central focus is likely to remain on whether or not this report will impact on the Fed’s decision to increase rates or not. Short-term volatility is likely to surround the release, given its focus, however, participants will likely take the release as more hawkish if there are minimal revisions to the previous two releases alongside a reading close to expectations. Additionally, this notion is likely to be supported further if the headline reading is particularly strong. In terms of asset classes, USD would likely see a bid alongside higher yields in US paper. However, the event could only have a short term impact due to the expectations for lift-off in December.