Largely responsible for the dollar and gold moves have been an increase in inflation expectations with a corresponding sharp rise in bond yields, along with exceptionally high expectations of a Federal Reserve interest rate hike in December. The futures market’s current view of the likelihood of such a rate hike has increased to an extreme just short of 100%. Further reinforcing this view have been a parade of Fed officials and speakers in recent weeks that have collectively telegraphed a rate move in December.
As for the Fed’s positioning, its so-called “dual mandate” is made up of: 1) maximizing employment, and 2) stabilizing prices. The latter function utilizes monetary policy 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 plans for spending on infrastructure, as well as his stances on lower taxes and protectionist trade policies, has sparked intense anticipation of a rise in inflation. When this Trump-driven anticipation was coupled with the dramatic surge in energy prices due to Wednesday’s successful OPEC deal, inflation expectations have become even stronger.
The mandate to stabilize prices should therefore compel the Fed to raise interest rates in two weeks. But what about the first mandate of maximizing employment? This will be the focus of Friday’s US jobs report, which will be the last such report before the critical December Fed decision. While the past three months of non-farm payrolls (NFP) data have all initially disappointed forecasts, they have still shown a relatively solid and stable US employment picture overall. Furthermore, revisions to prior months have consistently bumped up the original data significantly. Last month’s number came out at 161,000 jobs added for October, which was lower than expected but still strong. A particularly bright spot was the average hourly earnings data, which surprised to the upside at +0.4% vs +0.3% expected.
In a way, this Friday’s jobs data may be less important for relevant markets like the US dollar and gold than it normally is. As mentioned, this is due to the very high probability of an impending rate hike that has already largely been priced-in. Therefore, an outcome that is around or above the consensus forecast – or even moderately below – should not have too much of a further impact on markets. Results that are MUCH worse than expected, however, would likely make the Fed’s decision significantly more difficult and move markets more sharply.
Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are around 165,000 jobs added for the month of November. The November unemployment rate is expected to come in at 4.9%, while average hourly earnings are expected to have increased by 0.2% after last month’s 0.4% increase.
Wednesday’s ADP private sector employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in substantially better than expected at 216,000 jobs added in November against prior forecasts of around 160,000. However, October’s ADP reading was revised down from the originally-reported 147,000 all the way down to 119,000.
Another key employment-related data release this week was the ISM manufacturing PMI employment component (the ISM non-manufacturing PMI will be released next week). Manufacturing employment continued to expand in November at 52.3, but at a somewhat slower rate than October’s 52.9.
Finally, November’s weekly jobless claims data has been a mixed bag. The most recent release on Thursday covering the last full week of November showed a significantly worse-than-expected (higher) number of claims at 268,000 vs 252,000 expected. This was the highest number of weekly jobless claims in over five months. The prior week also disappointed, but the first two weeks of November were lower (and better) than expected.
Forecast and Potential Market Reaction
Overall, the trend of solid but unspectacular employment numbers is likely to have continued from previous months into November. With consensus expectations of around 165,000 jobs added in November, our target range is around 160,000-180,000. If the actual data falls within this range or above, the report should not change the already-high expectations for a December rate hike, and should not move the US dollar or gold in any very substantial way. An outcome that is substantially lower than this range, however, could make a significantly negative impact on the rallying dollar, and a much-needed positive impact on currently-depressed gold prices.
NFP Jobs Created and Potential USD Reaction: