Your Last Minute Payrolls Preview: What Wall Street Expects

In just half an hour, the August payrolls report, critical in framing the Fed's September decision according to Stanley Fischer, will be released. As previewed earlier, here are the consensus expectations:

  • Change in Nonfarm Payrolls Exp. 180K, Prev. 255K, Jun. 287K
  • Unemployment Rate Exp. 4.80% , Prev. 4.90%, Jun. 4.90%
  • Average Hourly Earnings Exp. 0.20%, Prev. 0.30%, Jun. 0.10%

Broken down by bank, the expected payrolls change is as follows:

  • JPM +150k
  • Deutche Bank +160k
  • UBS +160K
  • Goldman +165k
  • Citi +170k
  • Wells +176k
  • BofA 180k
  • MS +185k
  • UBS +200k
  • Barclays +200k
  • Nomura +200k
  • CS +200k
  • SocGen +225k

As the graph below from Jim Reid shows, August has tended to be a weaker month relative to the rest of the year. Indeed since the start of the sample the average monthly payrolls reading is +186k while the average August reading is just +150k (which is the joint lowest with July). Although July's number went against this trend, will both July and August buck their seasonal trend?

Leading into the number the manufacturing ISM (49.4 vs. 52.6) showed broadbased weakness: New orders (49.1 vs. 56.9), production (49.6 vs. 55.4), employment (48.3 vs. 49.4) and inventories (49.0 vs. 49.5) all declined in August and this may have helped bring expectations down for today’s payrolls below the consensus noted on Bloomberg. Fed rate hike probabilities weren’t greatly moved (September down 2% to 34% and December unchanged at 60%) but we did see the Greenback come under pressure (Dollar index -0.38%) and 2y and 10y Treasury yields fall as much as 4bps and 6bps respectively from the pre-ISM highs. The S&P 500 ended the day unchanged after rallying back from early losses while US credit was a smidgen wider (CDX IG +1.1bps).

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Per RanSquawk, the latest NFP report expected at 0830ET remains as crucial as ever amongst market participants following the latest Jackson Hole symposium. Furthermore, last month finalised the consensus that May's report (11K) was purely an anomaly that has not been repeated. More importantly, the report does come ahead of September's FOMC rate decision on the 21st, with analysts looking to establish whether the report itself could realistically put September on the table if the figures were of an exceptional standard or whether, despite the gravity of the report, there are simply too many other data points to be considered.

The Jackson Hole symposium was the main event of last week whereby full attention was on Fed Chair Yellen's rhetoric and subsequent commentary by Vice-Chair Fischer. Chair Yellen stated that the case for a rate hike has strengthened in recent months while the economy is closing in on their inflation and employment objectives. Vice-Chair Fischer provided some of the most influential comments by stating that Yellen's comments were consistent with a potential hike in September. In terms of the expectations themselves, the headline expectation is still representative of strong jobs growth at 180K, while unemployment is expected to decline by 0.1pp to 4.80% while average hourly earnings are forecast to decline slightly to 0.2% on a monthly basis.

As ever, the data continues to be at the forefront of investors' minds with the latest ISM manufacturing release on Thursday decidedly on the negative side. As such, this may have abated some of the speculation that this jobs report could stoke the fire for a hike in September. Furthermore, the employment component of ISM also came in below the expected 49.6, coming in at 48.3. The Nonfarm productivity release which was in focus amongst individuals came in-line with expectations while ADP also saw minimal movement on the forecasted figures at 177K.

Market Reaction

As ever with the NFP release, the headline is likely to garner much of the initial focus with algorithms and fast money moves jumping on any large discrepancies. The wider context will always be considered, and to reiterate, if there was an absolutely stellar report, this could put September very much in focus for a hike. However, this year has continued to illustrate expectations over a potential hike ahead of a jobs report so the wider context has the potential to be taken with a slight pinch of salt. Furthermore, there will be various data releases out of the US ahead of the next meeting. Overall, if there is a strong report, the USD will strengthen across the board with treasuries coming under pressure, while equities have often seen a turbulent reaction due to indecision in the marketplace, yet some outperformance could be seen in financial names given the rate hike implications.

Indicatively, the last three months have seen huge outlier prints (a massive miss and 2 major beats - outside of normal ranges).

Goldman is less exuberant, expecting a 165k increase in nonfarm payroll employment in August, below consensus expectations for a 180k gain.

Payroll growth has been quite strong over the past couple months, rebounding to +292k in June and +255k in July following a disappointing +24k in May, leaving the trailing 3- and 6-month averages at roughly 190k.

Our below-consensus forecast primarily reflects seasonal quirks specific to the August payroll period. Since 2011, August payroll growth has fallen short of Bloomberg consensus expectations by an average of 49k, only to be revised up by an average of 71k in subsequent releases. Industry-level payroll data indicate that the education sector (specifically, education services and state & local government employment, the latter largely reflecting public schools) accounts for much of the upward revision, which mostly occurs from the first to the second estimate of payroll growth (Exhibit 1). In our view, the initial August weakness and subsequent revisions reflects seasonal adjustment challenges related to shifts in the timing of school calendars. Since this pattern failed to hold last year, we are estimating a more conservative 20k impact this year.

Arguing for a stronger report:

  • Job availability: The Conference Board’s labor differential—the difference between the share of consumers saying jobs are plentiful vs. hard to get—rose 1.7pt to +2.6, reaching a new post-crisis high.
  • Job cuts: According to the Challenger, Gray & Christmas report, job cuts fell a touch on a seasonally adjusted basis in August. Announced job cuts in the energy sector fell sharply in August, possibly reflecting a stabilization in energy sector employment.

Neutral factors:

  • Jobless claims: The four-week moving average of initial jobless claims during the survey week rose by 6k to 264k. Despite the modest increase, the level of initial claims remains near all-time lows, suggesting minimal layoff activity across the economy.
  • Service sector surveys: The employment components of the service sector surveys were mixed in August. The Richmond Fed (+1pt to +13) and Dallas Fed (+2.0pt to +5.8) surveys improved, although the NY Fed (-6.4pt to +2.8, not seasonally adjusted) and Markit PMI surveys deteriorated. Service sector employment rose 201k last month, and has increased 179k on average over the last six months.

Arguing for a weaker report:

  • ADP: ADP reported a 177k gain in private payroll employment in August, slightly below a revised +194k increase in July. Service-sector job gains softened a bit to 183k, manufacturing employment was flat, and construction employment fell 2k.
  • Manufacturing surveys: The employment components of the manufacturing surveys were mostly weaker in August. The ISM manufacturing (-1.1pt to 48.3), Philly Fed (-18.4pt to -20), Dallas Fed (-2.4pt to -5) and Kansas City Fed (-5pt to -10) and Markit PMI deteriorated, while the Richmond Fed (+1pt to +7) and Chicago PMI edged up. Manufacturing employment rose by 9k in July, but has declined by 6k on average over the last six months.
  • Online job ads: The Conference Board’s Help Wanted Online (HWOL) report showed a 3.7% decline in new online job ads in August, and little change to total jobs listed. However, we put only limited weight on this indicator at the moment in light of recent research by Fed economists that argued that the HWOL ad count—which has departed significantly from the job openings figures in the official Job Openings and Labor Turnover Survey (JOLTS)—has been influenced by price increases for online job ads.

We expect the unemployment rate to decline to 4.8% in August from an unrounded 4.878% in July. The headline U3 rate was unchanged in July, but up from a low of 4.7% in May, while the broader U6 underemployment rate edged up 0.1pp to 9.7%. The household survey was strong last month, showing a 420k increase in employment. Because the increase in employment was roughly matched by a similar increase in the labor force, the unemployment rate was unchanged. The labor force participation rate ticked up to 62.8%, close to where it has been since the beginning of the year. With trend employment growth still running at more than double our 85k estimate of the breakeven rate, we expect the labor market to reach full employment by early 2017 and to surpass it thereafter.

Average hourly earnings for all workers are likely to remain flat in August, in large part reflecting unfavorable calendar effects. As a result, we expect the year-on-year rate to decline to 2.3% from 2.5%. Nevertheless, the broader wage data remain encouraging: our wage tracker—which aggregates four measures of wage growth—stands at 2.6% year-on-year, a sign that diminishing slack is boosting wage growth.

The August employment report will be an important input into the FOMC decision at the September 20-21 meeting. A below-consensus number may well lead the bond market to reduce its expectations for a rate hike, but it is possible that Fed officials would look through moderate weakness given 1) the strength of the June/July payroll gain, 2) their sub-100k estimate of the “breakeven” payroll gain, and 3) the well-publicized tendency for weak first prints in August.

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Finally, keep in mind the "August Curse": August Non-farm Payrolls have been weaker than consensus expectations in each of the last 5 years and in 14 of the last 18 years of available data.

Note: This data compares the initial data print with the consensus expectations at the time of the print.

And furthermore, going back 25 years, no month has produced less jobs than August, as Ryan Detrick points out.