We have the much anticipated US January Non-Farm Payrolls coming up on Friday at 08:30 EST (14:30 CET), which will be arriving along with a lot of other important data.
Unlike other economic releases, NFP has not been affected by the government shut down. With the FOMC meeting in the rearview mirror, attention is shifting to fresh data from the US market. Here are some things to keep in mind ahead of the release.
Non-Farm Payrolls
As the name suggests, out of all the data being released, this is the most important. It’s the total number of jobs created in the prior month, excluding farming jobs because they are seasonal (and also government and non-profit jobs). It is the best gauge of the current employment situation in the US and is closely followed by the Fed as part of its dual mandate.
When considering the potential impact of the NFP results on the market, there are two factors to keep in mind: first is the issue of employment.
If businesses are hiring people, it’s because they expect to have an increased demand for their products and need more personnel to at least maintain, if not increase, production. This is a sign of a healthy economy.
On the other hand, if jobs are being cut, then there are significant concerns within the economy. The second factor is inflation because the conventional wisdom is that as wages increase, there is more demand, which could lead to higher inflation. However, if inflation starts getting out of hand, then the Fed could intervene to try to keep things in order by raising rates.
We also shouldn’t neglect the revision to the prior month, which is also capable of moving the market, especially if the headline number is in line with expectations. The last release saw a revision to the upside to the prior month, which helped solidify the overwhelmingly positive result. However, last month’s blow-out numbers could be subject to a change on the downside.
A consensus has built over time now that a “normal” NFP is going to be in the range of 180-200K, with a number significantly above that seen as very good; and a number below that as quite disappointing – and the market will usually react along those lines. For the upcoming release for January, expectations are for 165K jobs added, which is half of December’s 312K.
It used to be that ADP employment change was seen as predictive of NFP, but it’s lost a bit of its reputation late. Nevertheless, it’s worth considering, and that came in surprisingly high at 213K, well above the 178K expected. (For reference, ahead of last month’s release, ADP had 263K adds compared to 312K adds in NFP).
Average Hourly Earnings
The second most significant bit of data released at the same time, is a survey of non-farm workers salaries. It’s seen as relevant to inflation because rising salaries, more than rising employment, imply inflation, and this can be an indicator of labor market tightness. The US has been below 3.9% unemployment for a few months now, which is below the consensus among economists of where structural unemployment is.
Expectations are for average hourly wages to have increased by 3.2%, in line with the prior month’s figure. Generally speaking, higher wages translate into USD weakness, while lower wages would be seen as stronger for the dollar.
Unemployment rate
Usually, the unemployment rate itself is more interesting to politicians and the media than it is to traders, who focus more on the underlying data. It can still move the market, especially if the other figures are in line with expectations. Current consensus is for the unemployment rate to stay steady at 3.9%.
The market can be influenced by the components of the data since employment trends in different sectors of the economy can give some important insight. It also can help explain why the headline missed, and calm concerns about numbers coming in out of line.
Sectors in focus continue to be construction, which actually increased its hiring pace last month despite it being winter, with 38K jobs added. With the rush of retail sales due to the holidays coming to an end, a drop in retail sales adds wouldn’t be surprising.
Many market observers are expecting the number to be on the lower end because that’s a general pattern observed after a really high number the prior month. Additionally, the government shutdown might have had some impact on employment, given the retention of salaries for over three weeks to 800,000 people.
The Market Moves
With so much data coming out at once, it can take the markets a few minutes to digest it all, and there can be some significant swings in both directions during that time. Afterward, the market typically settles down to its new pattern. However, with the FOMC meeting concluding just two days prior, a little less volatility wouldn’t be out of the ordinary.
