US Payrolls stayed solid in December

US Payrolls stayed solid into December

December payrolls forecast at 190,000

The booming US job market showed few signs of softening significantly in December, according to forecasts of the last payrolls update for 2017 that will be released on Friday.

Readings that investors typically use as curtain raisers for official non-farm payrolls continued to paint a picture suggesting one of the strongest hiring sprees in decades. ADP Inc.’s private tally on Thursday showed employers stepped up hiring in December and planned layoffs by U.S.-based companies fell sharply.

A separate release did show the third weekly rise in a row for unemployment benefits, but this looks more like an artefact of the holiday season, when hiring frequently becomes erratic. ADP said payrolls rose by 250,000, the biggest rise since March, beating economists’ estimates of 190,000.

Elsewhere, recent data have shown manufacturing payrolls up by 9,000 in December with construction-sector jobs increasing by 16,000. The largest official U.S. employment segment, covering service industries, added another 222,000 jobs last month. All told, judging by indicators in the run-up to Friday’s release, investors are likely to have confidence in forecasts for a rise in payrolls of around 190,000. That outcome would follow November’s higher-than-forecast 228,000 outcome.

The other closely watched metrics in the U.S.’s monthly Employment Situation report, the unemployment rate and average hourly earnings growth, are forecast to be steady at November’s 4.1% and 2.5% respectively.

Likely market reaction: bullish payrolls small change for dollar?

As usual, the most potent market impact 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 stand out.

USD/JPY

The dollar has remained supported above 112 yen for about a month now but its long-term range is very much in effect. The yen has fallen no lower than 114.6 since January 2016. With the pair currently drifting off December's highs around 113.68 yen, a breakout back towards to the top of the range does not look favoured on a technical basis. This suggests the dollar needs payrolls that are far stronger than forecast—like November's—to stride higher. It's worth noting that even after November’s blockbuster reading, USD/JPY’s surge faded relatively quickly.

Dollar Index

The obdurate yen is reflected in the Dollar Index's tortuous grind up from September's 18-month lows near 91. Four months have passed since then, and DXY barely has
one point of progress to show for it, after failing at a high of 95.15 late in October. Under these circumstances, again, any upside in reaction to Friday's jobs data is likely to be hard-won and possibly fleeting. Short-term resistance for the index is around 92.25, though support in the high 91s now looks well established.

10-year yields

Of all the classic dollar proxies, the 10-year Treasury yield seems to reflect the most promise that the greenback may soon gear-up more definitively. The yield has been in a clear rising trend since bottoming almost bang on 2% early in September. Furthermore, it's now possible to draw a fairly clean trend line along a string of progressively higher lows since the 18th of that month. The trend indicates that benchmark borrowing costs are inching higher - a typical sign of improving confidence in the economy. That said, the 10-year yield has most recently crept off the 9-month high of 2.5% it struck on 20th December. Failure to eye that rate again in the medium term (say in reaction to bullish payrolls) would corroborate the sluggish outlook indicated for other dollar-related assets.