Fundamental Fun with Orbex – October NFP

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The macroeconomic event getting all the attention this week is the release of last month’s US Non-Farm Payrolls (NFP), which is expected at 8:30 EST (13:30 CET). Along with the release is a host of other important employment data. Here are some things to keep in mind in the lead-up to the event.

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Non-Farm Payrolls

The headline number, as might be expected, will get most of the attention. This is the total number of jobs created by the economy last month, with the exclusion of farming jobs (because of their seasonality), as well as jobs from government and nonprofits. So, it’s the preeminent measurement for what’s going on in the underlying economy.

There are two factors that ought to be considered when evaluating the data: the first is the matter of employment itself. If employers are adding more jobs, it’s a sign of a strong economy, which could be seen as supporting the dollar. On the other hand, there is the issue that if more people have jobs, there will be more demand for products and services, meaning that prices could go up; and increased inflation is seen as weakening the dollar.

However, if inflation goes up too much, then the Fed is likely to intervene to tamp down what they see as an overheating economy, and that could lead to some dollar weakness.

Along with the primary number, we have the revision of the data from prior months which, if significant enough, can also move the markets. Last month’s release revised the month prior to that (August) from +201K to +270K, which was a significantly positive revision (and slightly helped cover the disappointing headline data). Last month’s numbers were impacted by Hurricane Florence, so we could see a bigger revision this time around.

The consensus for a while now is for a “normal” NFP number to be between around 180-200K; numbers significantly above that are seen as “very good” and numbers below that range as “unexpectedly negative” – and the market might react accordingly.

For the upcoming release, covering October, the expectation is for 190K jobs added against last month’s +134K. Last month was also impacted by a hurricane, but did not depress the numbers so much, since it didn’t do as much damage.

Although it’s been losing some of its reputation among traders lately, ADP numbers often were seen as predictive of what to expect from the NFP numbers. They were released on Wednesday and showed +227K jobs, well above the +189K expectation.

Average Hourly Earnings

Moving on to the next important number to be released, this shows how much private non-farm workers are paid, and is seen as a guide for inflation and how tight the labor market is. This number is closely followed by the Fed, since it covers both elements of their dual mandate.

The consensus expectations are for hourly wages to have increased by 3.1% compared to 2.8% from last month. An increase in labor costs can translate into higher inflation, and signal dollar weakness, as discussed above.

Unemployment rate

The unemployment rate isn’t as important for traders as it is for the media and politicians, but it can still move the market if all the other indicators come in line and this number is out of it. The rate is currently expected to stay at the current 3.7% level.

We shouldn’t forget that often the individual components of the data can move the market (or keep it from moving) as well. The components can help explain why the headline missed, or show an underlying issue that hasn’t impacted the primary number yet.

For example, if there is a large increase in the number of people employed, but the unemployment rate doesn’t budge, that can be explained by an increase in the labor force participation rate. This data sometimes takes longer for market movers to get their heads around and is one of the explanations for some of the market seesawing around the data release.

The market moves

Because there is much data coming out at once, it can take a while for the market to adjust to it all, especially if some of the data points in opposite directions, and that can lead to quite a bit of volatility in dollar pairs. It usually takes a few minutes for the market to subside, after which it will settle on a trend going forward.

Also note that at the same time we have the release of US trade balance, which is also going to be getting a lot of attention due to the trade war, given President Trump’s comments about potentially putting more tariffs on China, as well as recent comments from US companies regarding the impact of the trade war on earnings. 

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