The US economy has seen a steady gain in jobs in recent months. The upcoming report for the month of November holds higher expectations. In the current environment, a positive outcome will likely be dollar negative. NFP Preview.
According to last month’s release, the US gained 80,000 jobs in October. While this was slightly below expectations, the report included significant revisions for previous months, and a rise in the participation rate of the population. The overall picture remained very positive.
Indicators leading up to this report have been generally positive: ADP showed that the private sector gained over 200K jobs, better than expected. Although this report doesn’t always provide good guidance for the private sector figure in the official report, the positive trend seen in recent months is encouraging.
The Chicago PMI also exceeded expectations. The Philly Fed Manufacturing Index wasn’t so upbeat, but it remained positive for a second month in a row. ISM Manufacturing PMI was better than expected, but the employment component was lower than last month’s.
Contrary to last month, we don’t have the ISM Non-Manufacturing PMI figure before the release of Non-Farm Payrolls. The non-manufacturing sector, or services sector, is responsible for the vast majority of the economy. The employment component in this indicator is a good gauge for the Non-Farm Payrolls.
Expectations and Outcomes
Fear still dominates the markets. The coordinated effort by central banks to cut dollar swap rates provided only a temporary relief, but didn’t solve the underlying sovereign debt problems. A global downturn is still feared.
In this environment, a positive outcome means hope for the global economy and will shift money from the dollar and the yen to “risk currencies” such as the euro and the Aussie. A bad outcome will intensify the worries, with the dollar and the yen strengthening.
Expectations stand on a gain of 120K, 40K more than last month. A gain of 150K will not be a big surprise, given the aforementioned indicators.
Here are three general scenarios
- +80K to 200K: Such a result, within expectations, will shake the markets, but the long term impact will be marginal, with markets tuning in to European news very quickly, and forgetting about this numbers.
- +200K or more: A nice gain in jobs will weaken the US dollar against all currencies apart from the yen, in hope that the US can be the locomotive that will pull the world out.
- Under +80K: A weak US will be worrying, and this can exacerbate bad European news, if released. Fridays have a significant dose of bad news.
It is important to note the revisions for previous months, which were quite significant last month. If the total revisions are higher than 100K in any direction, this will also have an impact on the markets.
Regarding the unemployment rate, official expectations are for no change: 9%. Given the very gradual drop in weekly jobless claims (even though it stopped this week), a drop to 8.9% will not be a big surprise. The focus will likely remain on the Non-Farm Payrolls.
In any case, this event is highly volatile and has special characteristics. Please read the 5 notes for Non-Farm Payrolls trading and trade with care.