Fundamental Fun with Orbex: December US NFP

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Despite the US government shutdown, we are still expecting the release of the US Non-Farm Payroll data at 8:30 EST (14:30 CET), along with its accompanying myriad of important employment data.

Is the downturn in the stock market just an issue with the market, or are there underlying economic problems? Analysts will be turning to this data release to get some clarity, and here are some things you might want to keep in mind.

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Non-Farm Payrolls

As might be expected from the name, this is the key bit of data that we are looking out for. It represents the total number of jobs created the previous month, excluding farming jobs (because they are seasonal), as well as government and non-profit jobs. This is the best measure of the underlying employment situation and is a key part of what the Fed looks at in terms of policy.

There are two important factors to keep in mind when considering how this data might impact the market. First is the employment aspect; if businesses are hiring more people, it’s a sign that they expect to have more sales, which means the economy is doing or is expected to do well. This signals dollar strength.

The second factor is inflation; if more people have jobs, then there is more disposable income available, and that increased demand could lead to higher inflation, usually weakening the dollar. But, if inflation gets out of hand, then the Fed is likely to intervene, and that would make the dollar stronger.

We also shouldn’t forget the revision to the prior month, which can also move the markets when the headline is in line, or there is something very unexpected. We’ve now had three months in a row where the prior month was revised downwards, and with October’s number well below expectations, another downward revision would be quite surprising and concerning.

Remember that last month’s data came in at +155K, well below expectations of +200K – so a revision to the upside would hardly be a shocker. By now the effects of the summer’s hurricanes should be out of the system, and it’s too early to see an impact from the fires in California.

There has been a consensus building that a “normal” NFP will come in a range of 180-200K. Numbers below that range are seen as bad for the dollar and a poor reflection of the job-creating ability of the economy, and a significant beat would likely translate into dollar strength.

Let’s not forget that traders are a bit nervous considering the progressive slump in US stock markets, so some good news from the labor market would be a relief. However, for the month of December, expectations are for +177K compared to prior month’s +155K.

Average Hourly Earnings

Second on the list of importance but also released at the same time is the survey of non-farm worker salaries. This gets extra attention because it’s closely followed by the Fed (and we’re waiting to see what they will do this year in terms of hikes). It’s relevant to inflation because increasing salaries implies increasing demand; and it’s also a measure of labor tightness, which can have an impact on economic growth (given the very low unemployment rate, this is a growing concern).

Consensus expectations for average hourly wages are for wages to have grown 3.0% annually, compared to the 3.1% registered the prior month (the quickest pace since 2009). Previous months have also been revised down, and given the outstanding performance last month, a further point or two revision wouldn’t be all that much of a surprise.

Unemployment rate

The unemployment rate generally doesn’t get as much attention by the markets as it does by the media and politicians; the focus is more on the underlying components, such as the labor force participation rate. However, it can still move the market if it’s a major surprise, of course. The current consensus is for the rate to stay steady for the third month in a row a 3.7%.

The data components are also capable of moving the markets, especially if the headline data is in line with expectations. They can also explain discrepancies in the primary numbers and ease concerns. This is why you can get a strong move immediately in one direction on the headline number, and then a course correction as the data is analyzed.

Of the components, there will be extra focus on the retail sector, since that will give some insight into how well businesses did over the vital Christmas shopping season. November saw the addition of +18K jobs.

Another component is construction, with renewed discussion regarding trouble in the housing market due to the Fed’s interest rate hikes and a flattening of 30-year mortgage yield. Two months have seen +30K jobs added in this sector.

The market moves

Under normal conditions, the host of data coming out at once does take the markets a bit of time to digest it all, leading to some immediate market volatility, especially when different bits of the data point in opposite directions. During government shutdowns, however, the data is only published on the website, instead of being released previously to media companies; and this causes a bit of a delay as individual investors have to go to load the webpage at the Bureau of Labor Statistics. The sudden demand on the servers can cause some consternation among investors, and that can make the market behave even more erratically than usual and mean that it takes a little longer for it to settle down into its new trend.

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