US NFP Preview Will a Good Jobs Report Prompt a November Rate Hike

More hawkish pronouncements recently by US Federal Reserve officials, both policy-voting and non-voting members, have continued to keep alive the possibility of a Fed rate hike in November. Although the likelihood of this occurring is still rather low due to the fact that a major risk event in the US presidential election looms just six days after the Fed meets in November, several Fed officials have insisted that a rate hike is both warranted and likely within the near future. Whether this means November, December, or early next year remains to be seen, and will be largely dependent on economic data in the run-up to the next few Fed meetings, perhaps most notably the September jobs report due out on Friday.

Aside from the handful of Fed speakers that have emerged lately to advocate the need for and probability of a rate hike by the end of this year, key US economic data points have recently provided some strong support for such a hike. This series of positive economic data has led to a sharp rally for the US dollar and an even sharper drop for gold prices within the past week. Most notable of these optimistic data points have been: both the ISM manufacturing and non-manufacturing (services) PMI this past week; the final Q2 GDP number that was released late last week; and the past three weeks of US unemployment claims. All of these releases have come out markedly better than expected, showing some sustained strength in the US economy and helping to support a near-term Fed rate hike.

As always, Friday’s non-farm payrolls (NFP) employment report will be among the most critical components affecting the Fed’s monetary policy trajectory, especially as it relates to the November and December FOMC meetings. As it currently stands the day before this potentially pivotal jobs report is released, the Fed Fund futures market sees only around a 15% implied probability of a November rate hike, while December remains above 60%. Of course, depending on the outcome of Friday’s jobs report, these probabilities will likely change, potentially affecting the recently surging US dollar, the buoyant but consolidating equity markets, and plunging gold prices in particular.

The NFP reports for the past three months have generally painted a consistently strong picture of the US employment situation, despite August’s lower-than-expected 151,000 jobs added. Data from June and July showed exceptionally positive results at revised figures of 292,000 and 275,000, respectively. This general trend of improving labor market conditions was conspicuously acknowledged by Fed Chair Janet Yellen after the September FOMC meeting, but she also stated that the Fed would like to see further improvements in the labor market, along with a rise in inflation.

Clearly, a better-than-expected outcome on Friday that extends the recent series of positive US economic data should increase the probability of a rate hike substantially, potentially even for the currently slim chances of a November Fed move. Such a scenario should then give a further boost for the dollar while pressuring gold even further and weighing somewhat on equity markets. A data 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 170,000 jobs added for the month of September. The September unemployment rate is expected to come in unchanged at 4.9%, while average hourly earnings are expected to have increased by 0.2% after last month’s 0.1% increase.

Wednesday’s ADP private sector employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in relatively strong but moderately worse than expected at 154,000 jobs added in September against prior forecasts of 166,000. Additionally, August’s ADP reading was revised slightly lower from the originally-reported 177,000 down to 175,000.

However, other key employment-related data releases this week have shown much better results for September, including both the ISM manufacturing and non-manufacturing (services) PMI employment components. Though still in contraction, the manufacturing employment index for September improved to 49.7, almost at the 50.0 expansion threshold, up from August’s 48.3. The even more critical services employment index gained dramatically in September to a 57.2 expansion, up substantially from August’s 50.7 reading.

As for September’s weekly jobless claims data, all reports have generally come out near long-term lows and significantly better-than-expected. Thursday’s release covering the last week of September showed a better-than-expected (lower) number of claims at 249,000 vs 255,000 expected. The preceding three weeks in September also showed numbers that were lower than forecast, indicating consistently optimistic unemployment claims data.

Therefore, despite the lower-than-expected ADP numbers, the other leading employment indicators have pointed to an actual NFP reading on Friday that could likely be better than the expected ~170,000 jobs added for September, potentially falling in a target range around 175,000-200,000. Any substantial deviation from consensus could make a significant market impact, as mentioned, primarily on the US dollar and commodities like gold. In particular, the currently surging USD/JPY and plunging GBP/USD, as well as sharply depressed gold and silver prices, could make some substantial directional moves depending on Friday’s actual reading and its potential monetary policy implications.

NFP Jobs Created and Potential USD Reaction:

> 200,000
Strongly Bullish

170,000-200,000
Bullish

150,000-169,000
Moderately Bearish

< 150,000
Strongly Bearish