US NFP Preview: Will another good jobs release finally move the Fed?
James Chen September 1, 2016 10:16 PM
<p>The Non-Farm Payrolls (NFP) employment report coming up on Friday will be an exceptionally critical one in relation to the Federal Reserve’s monetary policy trajectory […]</p>
The Non-Farm Payrolls (NFP) employment report coming up on Friday will be an exceptionally critical one in relation to the Federal Reserve’s monetary policy trajectory in late September and beyond. Fed members, most notably Fed Chair Janet Yellen, have repeatedly stressed that economic data takes center stage in the central bank’s policy decisions, and the labor market is one of the most important components of that decision-making.
Yellen remarked in last week’s Jackson Hole Economic Symposium that the case for a rate hike “has strengthened in recent months,” and that this was largely due to “solid performance of the labor market and our outlook for economic activity and inflation.” These remarks were followed shortly after by a televised appearance featuring Fed Vice Chair Stanley Fischer, in which he stated that Yellen’s speech was consistent with the possibility of a rate hike in September and potentially more than one rate hike by the end of 2016. This statement was tempered as usual, however, by the statement that “these are not things we know until we see the data.”
As a result of these relatively hawkish pronouncements, the market’s expectations of a Fed rate hike increased markedly and the dollar sharply extended its recent surge. For the most part, this surge has continued this week in the run-up to Friday’s critical jobs report.
The NFP reports for the past two months have painted a rosy picture of the US employment situation. June’s data, released in early July, revealed an exceptionally positive 287,000 additional jobs versus prior expectations of 175,000. The actual number was subsequently revised even higher to 292,000. July’s numbers, released early last month, similarly showed a much better-than-expected reading at 255,000 non-farm jobs added against forecasts of 180,000. Of course, those two stellar months followed a colossally disappointing reading for May (a dismal 11,000 jobs added), but the positive turnaround in the data since then has apparently been quite dramatic and has been acknowledged as such by Fed members.
Friday’s jobs data will be the last major employment release before the next FOMC policy meeting and statement on September 21st. As it currently stands immediately prior to Friday’s NFP release, the Fed Fund futures market is showing a 24% implied probability of a rate hike at the September meeting. This number could change immediately and drastically, however, depending on the outcome of Friday’s release.
Clearly, another better-to-stellar outcome following the last two very positive months should increase the rate hike probability substantially, which should then further boost the recently surging dollar while further pressuring depressed gold prices. A surprise to the downside, however, should lead to a significant pullback for the dollar and rebound for gold.
Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are around 180,000 jobs added for the month of August. The August unemployment rate is expected to come in at 4.8%, while average hourly earnings are expected to have increased by 0.2%.
Wednesday’s ADP employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in slightly better than expected at 177,000 jobs added in August against prior forecasts of 174,000. Additionally, July’s ADP reading was revised substantially higher from the originally-reported 179,000 up to 194,000.
Other recent employment-related data for August have shown somewhat mixed results, including Thursday’s ISM Manufacturing employment component. This key survey came out at a disappointing 48.3 contraction for August, which represents an acceleration of July’s 49.4 contraction. The ISM Non-Manufacturing employment component for August comes out next week and is therefore not a factor as a pre-NFP input. As for August’s weekly jobless claims data, they have all come out better-than-expected. Thursday’s release covering the last week of August showed a slightly better-than-expected (lower) number of claims at 263,000 vs 265,000 expected. The preceding three weeks in August also showed numbers that were lower than forecast, indicating consistently positive jobless claims data.
Despite the discouraging ISM Manufacturing data, other leading employment data points are pointing to an actual NFP reading on Friday that could likely be somewhat better than the expected ~180,000 jobs added for August, with a target range around 185,000-200,000. However, one caveat should be stressed: for the past five years, August jobs data has disappointed expectations each and every year. Caution, therefore, should be exercised when trading potentially affected markets, as always. Any substantial deviation from consensus could make a significant market impact, primarily on the US dollar and commodities like gold. In particular, both EUR/USD and USD/JPY could make some substantial moves, as is often the case, depending on Friday’s actual reading and its potential monetary policy implications.
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