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 Thursday 01 December 2016

Non-Farm Payroll look-ahead - PM Bulletin



Tomorrow sees the latest update for US Non-Farm Payrolls. Typically this is the biggest data release in any month as it is the main measure of US employment. Maximising employment, along with maintaining price stability, make up the Federal Reserve’s dual mandate. The Fed is also expected to ensure a reasonable rate of interest. But that’s something that went out of the window years ago when the US central bank decided to favour borrowers over savers when it came to monetary policy.

The Federal Reserve holds its key monetary policy meeting in less than two weeks’ time. According to the CME’s FedWatch Tool the probability of a rate hike on the 14th December now stands at 96%. This is down from the 100% level it briefly traded at last week but still suggests that investors are preparing for the first rate hike from the Fed since this time last year.

This being the case, it’s debatable whether tomorrow’s release is really that important. After all, the Fed has spent the last few months preparing the markets for a hike. It would be far more disruptive if the Fed held back from hiking rates now as investors would wonder what the central bank could see which they couldn’t.

With the US presidential election out of the way, that political dimension is no longer an obstacle for a rate hike. Also, Trump’s surprise victory hasn’t led to the kind of market turmoil which may have stayed the Fed’s hand when it came to raising rates. If anything, Trump’s proposed tax cuts and infrastructure spending plans suggest that inflation could pick up and easily overshoot the Fed’s 2% target. Consequently, investors should be more concerned about the prospect for future rate increases rather than a single 25 basis point hike in a fortnight’s time.

Yesterday the ADP Payroll release showed an increase of 216,000 - well above the 161,000 expected. On the face of it this bodes well for tomorrow’s Non-Farm Payroll number. While there’s little direct correlation between the two data sets, typically whenever the ADP number comes in significantly above or below expectations, this is reflected in the official payroll release.

The consensus expectation is for payrolls to show an increase of 165,000 in November - just a touch above the 161,000 from the previous month. We’d really have to see a disastrous number tomorrow for investors to worry about the US economic outlook and readjust the odds on a rate hike on 14th December. Consequently, we should expect a benign market reaction to, say, 150,000 or above. In fact, I can’t really see investors getting too concerned about the US economic outlook unless payrolls plummet below 100,000 or so.


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Posted by David Morrison

Category: PM Bulletin

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