Incisive market commentary from David Morrison

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Non-Farm Payroll look-ahead - PM Bulletin
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 Thursday 06 October 2016

Non-Farm Payroll look-ahead - PM Bulletin



Just over three weeks ago the US Federal Reserve voted to keep its key fed funds interest rate unchanged. Ever since then we’ve had a procession of regional Fed presidents poke their heads out of their burrows and declare that the conditions are just about right for a rate hike. Yesterday Fed Vice-Chairman Stanley Fischer said that ultra-low rates were not necessarily here to stay. Earlier this week Chicago Federal Reserve Bank President Charles Evans said he would be "fine" with raising rates by year-end if the US economic data continued to improve. He went on to say that any move was most likely at the December meeting, although November shouldn’t be ruled out. The market seems to agree with this assessment. According to the CME’s FedWatch Tool there is now a 60% chance of a rate rise at the December meeting. There’s even a 15% probability of a hike in early November – just one week ahead of the US Presidential Election.

But it isn’t just comments from Fed members which have raised the prospect of tighter monetary policy this year. There has also been an improvement in recent US economic data releases. This week we saw a sharp bounce-back in the ISM Manufacturing and Non-Manufacturing PMIs. This followed a couple of dismal readings for August. Now all attention turns to tomorrow’s US Non-Farm Payrolls, arguably the most important of all US data releases. Not only is employment an emotive issue and something that we can all relate to, it is also one half of the US Federal Reserve’s dual mandate. As far as investors are concerned, tomorrow’s number will influence the Fed’s thinking on the timing of future monetary tightening.

The consensus expectation is for a payroll increase of 170,000 which would be an improvement on August’s 151,000. A poor number would be anything around 150,000 or below (putting aside any significant revisions to prior releases). This would lead to a decline in expectations of a rate hike in 2016 and should result in a sell-off in the US dollar and a sharp bounce in precious metals. A good number would be anything above 180,000. This should lead to a stronger dollar and keep a lid on any recovery in gold and silver. How the stock market reacts is anyone’s guess. But considering recent moves, US equities look likely to rally on a strong number – initially at least.

We’ll also get an update on Average Hourly Earnings and the Unemployment Rate. It is the former number that is most important and a reading of +0.1% or below (month-on-month) will be market-negative as it will weigh on inflation. Later in the day we have speeches from FOMC-voting members Stanley Fischer, Loretta Mester, Esther George and Lael Brainard.

It is worth noting that Wednesday’s US ADP Non-Farm Employment Change showed an increase of 154,000 for September. This was lower than the 166,000 expected and considerably below the 175,000 recorded in August.  The ADP is generally a poor predictor for Non-Farms yet any big discrepancies from the expected number should be taken seriously. This is because the privately-collated ADP data tends to be considerably less volatile than the government’s NFP survey. Consequently, it’s possible that Wednesday’s poor number could foreshadow weakness in tomorrow’s data.


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Posted by David Morrison

Category: PM Bulletin

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