US Labour Market set for a Reality Check Non Farm Payrolls Outlook

With the first Friday of the month fast approaching, focus switches towards the latest US jobs figures, where a surprisingly strong labour market in July is expected to slow in August.

Last time around both non-farm and private payrolls blasted past somewhat downbeat expectations with US employers hiring the most workers in five months and breaking three months of consecutive jobs growth slowdown.

Despite the jump in hiring in July, August is expected to see a return in jobs growth slowdown.

Current forecasts for Fridays US jobs figures is:

Market Reaction

The market reaction will, as always, be weighted in how much the actual figures beats or fails to meet expectations. Added to this element is the added caveat that investors will inevitably utilise any important economic data out of the US – to which non farm payrolls perhaps is one of the most important – to gauge the likely chances of the Federal Reserve in moving to increase stimulus measures for the US economy past the existing extension to Operation Twist (which finishes at the end of this year).

From an equities perspective, it may well fare out to be a ‘win-win’ situation. A worse than expected reading would normally see a knee jerk bearish reaction in the markets. Yet still, a weak reading of below 100,000 jobs would apply even more pressure on the Fed to start a third phase of quantitative easing, particularly if the unemployment rate nudges up to 8.4%, which would be its highest level of unemployment since December last year. A bad reading would not be what President Obama wants to see, with the US Presidential election due in just two months and so there could also be some political pressure on Bernanke to ease any pain in the markets. A worse reading could therefore limit the scale of any knee jerk bearish reaction in equities.

A better than expected reading however typically sees a positive reaction in the markets, and is likely to be cheered by investors, initially. But yet again, it will also dampen expectations of additional Fed stimulus, particularly if we see a particularly strong reading.

There is also likely to be a scenario where we could either seen a double positive or double negative for the US dollar. A strong reading would likely be double positive, in that it’s a good sign for the US economy and lessens the chances of more stimulus in the immediate term. A weak reading could be double negative for the green back currency, as it would indicate further pressures on the US labour market and increase optimism that the Fed will be forced to act soon.

Onto Friday’s jobs data…