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 Thursday 04 February 2016

PM Bulletin: Non-Farm Payroll look-ahead

 

 

It’s that time again. Tomorrow is the first Friday of a new month so that means the release of the latest US Non-Farm Payroll data. This is arguably the most eagerly anticipated of all economic data releases, covering as it does the employment picture of the world’s biggest economy.

Once again it takes on particular significance for a number of related reasons. Firstly, we’re still experiencing considerable market volatility and uncertainty. Secondly, we are now going into a lengthy period before we have any significant central bank meetings. Thirdly, there’s a very active discussion going on concerning the US Federal Reserve’s economic projections and the amount of monetary tightening we can expect over the coming year. It’s this last point which is the main prism through which to view payrolls.

The Federal Reserve has a dual mandate: to maintain price stability (keep a handle on inflation) and to ensure maximum employment. In the last respect it has been quite successful – at least as measured by the Unemployment Rate and Non-Farms. Arguably, it was the strong jobs data in the latter half of 2015 which pushed the Fed into their (mistimed) rate hike in December.

But what would another strong payroll number mean for the markets tomorrow? Earlier this week the US dollar tanked. The sell-off boosted crude and led to a sharp short-covering rally in equities. The moves came as investors recalibrated the outlook for Fed rate hikes for the rest of this year. Most analysts believe that a full 1% increase is out of the question. Now we need to hear the Fed confirm this. So does this mean that a strong payroll number is bad for stocks? After all, it points to economic strength and suggests that the Fed was right to raise rates last year and could be right to continue tightening this year as well.

The consensus expectation is for a modest increase of 189,000 jobs in January – well down on December’s knock-out 292,000 but fine when taking a three month average. The Unemployment Rate is expected to come in unchanged at 5.0%. This is a tricky one and it will be very instructive to see how it plays out. I’d be surprised if the initial market reaction ends up prevailing over the day as bullish/bearish opinion is quite equally divided currently. But if we have a strong number and the major US indices end the day lower, then once again, “good news is bad”. 

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 NFP

Category: PM Bulletin


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