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 Thursday 03 November 2016

Non-Farm Payroll look-ahead - PM Bulletin

 

 

There’s no doubt that next week’s US Presidential Election is the most important event in the calendar. But no matter who wins, it won’t take long before investors are forced to refocus on the likelihood of a Fed rate hike in December.

Last night the Fed’s FOMC held off from making any changes to monetary policy. The meeting was widely expected to be a non-event as it took place just days before the US Presidential Election. There was no Yellen press conference after this meeting, but there were a few points worth noting. Firstly, only Esther George and Loretta Mester voted for an immediate hike whereas they were joined by Eric Rosengren back in September. Secondly, there was one significant change in the Fed’s statement. The phrase, “Inflation is expected to remain low for the near term" was replaced with: "Inflation is expected to rise to 2% over the medium term." Thirdly, the FOMC stated that the case for an increase in the fed funds rate had continued to strengthen.

The US central bank has spent the last couple of months convincing the markets that it’s ready to go in December, and this latest statement reinforces the case. Now it’s possible that they could delay a rate hike if Trump wins the presidency next week. The market hasn’t fully priced in this possibility so the reaction could be even more extreme than the one we saw for the Brexit vote back in June. But putting that aside, there is now less than six weeks until the Fed’s next meeting and the only other thing that could stay the Fed’s hand is a significant deterioration in the US economic data between now and then. On Tuesday the ISM manufacturing PMI for October came in at 51.9, slightly above the consensus expectation of 51.8 and a modest improvement on last month’s 51.5. Then earlier today the ISM non-Manufacturing PMI came in at 54.8. This represented a decline from September and was lower than forecast. Nevertheless, it still indicates that the Services sector is expanding. Neither number points to an economy that is firing on all engines. However, there’s no reason for investors to expect the Fed to be unduly worried about either report.

Now the focus turns to tomorrow’s Non-Farm Payrolls. The consensus expectation is for an increase of 176,000 jobs. This would represent a decent bounce-back from September’s weak report when 156,000 jobs were created on expectations of 171,000. As a consequence, investors are likely to be disappointed by anything below 160,000 (leaving aside any revisions to last month’s data) and this should lead to further losses for the dollar and gains for precious metals. A good number will be anything above 180,000 or so. However, what really matters now is anything which could derail a December rate hike. It’s unlikely that the market view would change unless we saw a jobs number below 120,000 or so. Even then, investors would soon put this aside to see how next month’s number comes in. This will be the final update before the Fed’s December meeting.  

It’s worth noting that Wednesday’s ADP Non-Farm Employment Change came out at 147,000 - well below the 166,000 expected. The ADP is a poor predictor for Non-Farm Payrolls. Nevertheless, big misses (or gains) in the ADP numbers are typically reflected in the government’s payroll survey. Consequently, we shouldn’t be surprised to see Non-Farms come in below 176,000 tomorrow afternoon.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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