Strong Payrolls reading needed to extend dollar rebound

Pause signalled

As we head into the release of always closely watched monthly U.S. jobs data, markets are particularly looking for confirmation of the stabilisation in hiring activity seen in October, after storms disrupted the month before.

Indications usually relied on by investors are mixed. ADP’s regular private assessment of payroll additions in November, out earlier this week, came in at the higher end of an 185,000-190,000 forecast range. That is, however, lower than October’s 261,000 result and the 200,000 economists’ forecasts project for November.

Furthermore, both of the most recent business sentiment gauges published by the U.S. Institute for Supply Management (ISM) were soft across the board. The jobs component of the ISM’s Manufacturing PMI missed forecasts, at 59.7 versus 60 expected, whilst the counterpart gauge in the institute’s November service sector update fell 2.2 percentage points to 55.3%. Of course, key ISM readings for the month before reached multi-year highs, so November’s disappointing outcomes still projected some of the most optimistic business intentions for years. Additionally joblessness also looks right now. Weekly jobless claims for last week fell 2,000. Most importantly, the 4-week average in weekly claims has been steady close to 240,000 since early November.

No alarm bells

Overall then, whilst many recent inputs to current expectations have been weak, no alarm bells are ringing to suggest forecasts of a 200,000 rise in non-farm payrolls on Friday will be missed. Expectations on other U.S. employment metrics in focus also look undemanding relative to the long-term trend. The unemployment rate is seen remaining flat at October’s 17-year low of 4.1%. Average hourly earnings growth is also expected to be largely static at 2.4% year-on-year as per October, with a rise of 0.2%-0.3% projected on a monthly basis.

Fed doves watching

Friday’s data will have added importance for the market, coming in the week before the Federal Reserve is likely to execute a very strongly telegraphed interest rate rise. Given the Federal Reserve’s crystal clear guidance for most of the year of a December hike, it seems nothing short of a significant unforeseen event could take the policy tightening off the table. However, policymakers on the more dovish side of the Federal Open Market Committee can be expected to be emboldened in the event of a disappointing (NFP) outcome or weaker than expected ancillary data. The logical extension of that supposition is that the dollar’s current rebound could be definitively capped in the event of soft jobs data. In fact, with U.S. stock index futures pointing to a continuation of a rebound on Wall Street after the S&P 500 fell for three out of the last five sessions, a jobs let-down could have a harder impact on equities too, which have declined in the wake of renewed tech sector jitters, an edge of the seat saga in Washington around tax reform and a possible government shutdown over the debt ceiling among other affairs.

Dollar fatigue sets in

As usual, though, the most potent market impact in either direction from the jobs data is likely to be seen in dollar markets, particularly against the yen and in 10-year U.S. Treasury yields. Euro and sterling moves could also standout, as could those by the FTSE 100, a fair dollar proxy.

USD/JPY

The dollar has tested short-term support near 113.15 yen already on Friday, whilst maintaining its positive tone, some 39 sen higher. If that level gives way in the event of jobs readings that the market deems to be negative, a one big figure fall to 112.4 looks plausible given attenuated volume around the highs in prior days this week.

Dollar Index

The dollar index is already looking like it needs a rest after four straight sessions of rises and a mini-uptrend from end-November. Current prices on the 94 handle are near 94.16, where the index reversed following an even more September-to-early November up leg. A well-received jobs report could lift the index through that resistance, though as momentum gauges are overbought, the dollar could still give back any spike in the near-term.

10-year yields

10-year yields remain within their 2.29%-2.42% 7-week range. If they get as far as 2.42% on a non-farm ‘beat’, that is likely to be the foreseeable limit, whilst support very near 2.32% is likely to withstand a moderate disappointment.