With December’s 25-basis-point rate hike by the Federal Reserve in the rearview mirror, US market attention in the new year has shifted full focus both to Donald Trump’s inauguration as US President on January 20 and the pace of Fed rate hikes in 2017. As usual, Friday’s jobs reports will play a role in helping to determine the latter. In turn, the Fed’s near-future pace of tightening and Trump’s economic policies going forward will likely continue to make a major impact across a broad array of financial markets, including US equities, the dollar, and gold.
As for the Fed’s positioning, its dual mandate consists of maximizing employment and stabilizing prices. The latter function utilizes monetary policy (i.e., interest rates) to control rising inflation, which has not been a significant concern for quite some time – until, that is, Trump became the new president-elect.
Widespread speculation over Trump’s aggressive spending plans has sparked intense anticipation of a rise in inflation. When this Trump-driven anticipation was coupled with surges in energy prices due to the recent deal among major oil producers to cut output, inflation expectations have become even stronger. In turn, higher inflation expectations have fueled higher interest rate anticipation, boosting the US dollar while weighing on gold prices. Up to the first trading day of the new year, the US dollar had been on an epic rally and gold had been heavily pressured.
When it comes to jobs, Donald Trump has repeatedly stressed his strong focus on job retention and creation in the US. This promise follows on the heels of solid monthly employment increases throughout most of 2016, which highlights a healthy US employment landscape that potentially supports a more robust pace of interest rate increases by the Fed in 2017.
Last month’s strong showing of 178,000 jobs added for November was, along with consideration of Trump’s fiscal spending plans, a key component in the Fed’s widely-expected decision to raise interest rates for the second time in over ten years.
As noted, this Friday’s US jobs report will be the last such report before inauguration of the new Trump Administration on January 20. While the past several months of non-farm payrolls (NFP) data have sometimes disappointed expectations, they have still shown a solid and stable US employment picture overall. After the Fed not only raised interest rates in December but also indicated that officials now expect three further rate hikes in 2017 instead of two, focus has turned to the pace of Fed tightening this year. Certainly, better-than-expected jobs data could help accelerate the process while worse data could impede it.
Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are currently around 175,000 jobs added for the month of December. The December unemployment rate is expected to come in at 4.7%, while average hourly earnings are expected to have increased by 0.3% after last month’s surprise -0.1% decrease.
Thursday’s ADP private sector employment report, which sometimes serves as a limited indicator for NFP Fridays, came in significantly worse than expected at 153,000 jobs added in December against prior forecasts of around 170,000.
As for other key employment-related data releases for December: the ISM manufacturing PMI employment component expanded at a faster pace in December than the previous month - 53.1 versus 52.3 in November. In contrast, the even more critical ISM non-manufacturing (services) PMI showed a marked slowing of growth in December at 53.8 versus November’s 58.2.
Finally, December’s weekly jobless claims data has been relatively consistent, but generally a mixed bag. The most recent release on Thursday covering the last full week of December showed a significantly better-than-expected (lower) number of claims at 235,000 vs 262,000 expected.
Forecast and Potential Market Reaction
Overall, the trend of solid employment numbers is likely to have continued from previous months into December. With that said, the number could skew lower if the worse-than-expected ADP and ISM non-manufacturing employment data are to serve as any guide. With consensus expectations of around 175,000 jobs added in December, our target range is around 160,000-180,000. If the actual data falls above this range, the report should increase expectations of a faster pace of Fed rate hikes, thereby boosting the dollar further while potentially extending gold’s decline. An outcome that is substantially lower than this range, however, could make a significantly negative impact on the strong dollar, and lead to a further relief rebound for depressed gold prices.
NFP Jobs Created and Potential USD Reaction