US NFP Preview: Fed Focused on Jobs Report and Election
James Chen, CMT November 3, 2016 2:06 PM
1) Whereas there were three dissenting voters in the September FOMC meeting who wished to raise interest rates, yesterday’s meeting only had two – this was somewhat of a dovish indication. 2) The statement said that the committee wanted to wait for “some further evidence of continued progress,” where “some” was a new addition that suggested relatively lower criteria for economic progress – this was somewhat of a hawkish indication.
In the end, expectations for a December rate hike are not far off from where they were prior to the November Fed meeting. At this point, it is very clear that the Fed is waiting to see not only the outcome of the US presidential election next week, but also the next two jobs reports (including tomorrow’s) before the mid-December Fed meeting. Barring any potentially market-disrupting events (e.g., a Donald Trump presidential win, or much worse-than-expected employment data), the Fed appears highly likely to raise interest rates in December. Strong expectations for such a rate hike after this past Wednesday’s FOMC statement have helped to slow the recent slide in the US dollar.
Both Friday’s jobs report and next Tuesday’s presidential election are critical, but the election is likely of premium importance to the Fed. Like the financial markets, the Fed is highly averse to uncertainty and unpredictability, which Donald Trump fully represents. Any significant disruption of the markets and the economy as a result of a potential Trump win could likely preclude a December rate hike. The two presidential candidates, Trump and Clinton, are currently embroiled in a bitter back-and-forth that prominently features the FBI on both sides. Whereas Clinton may have previously appeared to be almost-assured as the 45th US President, her email troubles with the FBI that resurfaced a week ago have made the political landscape much less clear. With only a few days before the election, any new developments in the investigations could have a severe impact on which candidate ultimately wins the presidency. Next Tuesday stands out as the foremost risk event on the immediate horizon with respect to the Fed’s near-term policy decisions.
Aside from the election, however, Friday’s non-farm payrolls (NFP) employment report will also be among the most critical components affecting the Fed’s monetary policy trajectory in December and beyond. As it currently stands the day before this potentially pivotal jobs report is released, the Fed Fund futures market continues to see around a 70% implied probability of a December rate hike. Of course, depending on the outcome of Friday’s jobs report and Tuesday’s election results, this probability is very likely to change, potentially affecting the recently falling US dollar, pressured equity markets, and currently buoyant gold prices.
The NFP reports for the past two months have generally been both solid and stable, but have still failed to meet market expectations. In early September, August’s jobs data came out at 151,000 jobs added against the 180,000 expected, though the actual number was later revised up to 167,000. Similarly, September’s data that was released in early October was solid but disappointed forecasts at 156,000 jobs added against around 170,000 expected.
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 175,000 jobs added for the month of October. The October unemployment rate is expected to come in at 4.9%, while average hourly earnings are expected to have increased by 0.3% after last month’s 0.2% increase.
Wednesday’s ADP private sector employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in significantly worse than expected at 147,000 jobs added in October against prior forecasts of 166,000. However, September’s ADP reading was revised significantly higher from the originally-reported 154,000 all the way up to 202,000.
Other key employment-related data releases this week, including both the ISM manufacturing and non-manufacturing (services) PMI employment components, have shown that employment grew in October. The manufacturing employment index for October improved to 52.9, well above the 50.0 expansion threshold, up from September’s 49.7 contraction. The even more critical services employment index remained in expansion territory in October at 53.1, although it was down from September’s stellar 57.2 reading.
As for October’s weekly jobless claims data, all reports have generally come out not far off long-term lows but some have fallen short of expectations. For example, the most recent release on Thursday covering the last week of October showed a worse-than-expected (higher) number of claims at 265,000 vs 257,000 expected. This was the highest number of weekly jobless claims in nearly three months.
Overall, the trend of solid but unspectacular employment numbers is likely to have continued from previous months into October. With consensus expectations of around 175,000 jobs added in October, the target range is potentially around 160,000-180,000. If the actual data falls within this range, the report will be unlikely to change Fed expectations for December in any appreciable way. As always, however, a substantial deviation from consensus could make a significant market impact, most notably on the US dollar and gold prices. A significantly better-than-expected reading above the target range could prompt a sharp rebound for the recently-pressured dollar, and a pullback for gold. Worse-than-expected data, in contrast, could continue to push the dollar lower ahead of next Tuesday’s election, while also further boosting gold prices.
NFP Jobs Created and Potential USD Reaction:
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