NFP look ahead: Will PMI surveys provide the clues?

Looking ahead to tomorrow's payrolls number, could recent PMI surveys provide an insight as to what the number will be?

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Source: Bloomberg

Friday’s jobs report will be the subject of much speculation within the trading community, with the figures pored over for any sign that the US is more or less able to withstand a rate rise in 2016. At a time when political uncertainty is rife, there are mixed messages going into this release, with the potential for firms to ease off hiring with such a cloud looming over the economic future of the US. By and large, as US unemployment falls, so the expectations gradually fall for the payrolls number as the improvements become more marginal. With that in mind, the ability to post circa 180,000 jobs for the forthcoming months would by and large be perceived as sufficient for a December rate rise. However, the big question is whether we will indeed see such a jobs market as we move into the forthcoming months.

There are a number of different avenues to explore as a means of ascertaining what the payrolls number might look at. PMI surveys form one such source, with ISM and Markit providing employment breakdowns which can tell us something about where the NFP figure could go this month.


Below we can see the data from Markit, which shows a deterioration in the services employment index, highlighting the potential for services jobs to flounder this month. Historically we can see a clear correlation between the payrolls numbers and the employment index.

Crucially, the picture from the ISM services PMI survey points towards the complete opposite, with the employment index rising 6.5% to 57.2%, up from 50.7%. 

So which is it? The sheer size of the ISM outperformance for the sector does go relatively far in disproving the slower growth evident in the Markit reading. After all, the Markit reading remains in expansion and thus despite a perceived slowdown in the survey, the figure remains expansionary.


Looking at the ISM survey, we can see an improved yet contractionary employment situation for manufacturing, with the reading now just marginally below expansion, at 49.7 (see above).

Meanwhile, Markit (below) highlights a clear slowing down in the employment growth over recent years. However, this month saw the employment index pick up marginally following the recent decline in employment growth.


The ADP payrolls number provides a clue of what to focus on in this debate, with the breakdown of yesterday’s ADP NFP survey showing a significant outperformance of the services sector. Meanwhile, the manufacturing sector actually proved a drag on employment. 

This reliance upon the services sector is nothing new, with the manufacturing sector dragging the August payrolls number down by 20,000. As such, the best indicator to follow is the services sector data. While Markit does show a slowdown in services employment growth, the figure remains positive. Meanwhile, the incredible rise in the ISM employment index could be the clue to tomorrow’s number, pointing towards a potential outperformance compared with last month. Markets expect an improved NFP figure of 171,000, compared with the 151,000 last month. Will we see the payrolls overcome those estimates? The ability of the services sector to live up to ISM estimates will likely prove decisive for the all-important NFP number.

What for the dollar?

Should we see an outperformance in tomorrow’s jobs report, it would likely help the dollar on its way, in what has already been a stellar week for the currency. The chart below highlights the breakout that the dollar index is attempting. An hourly close above 96.48 would represent a bullish signal following an exit from this two-month ascending triangle pattern. Should that occur, we would be looking for a move back above 97.62, signaling further weakness for the likes of EUR/USD and GBP/USD. However, a weak jobs report could provide a reversal, dragging price back into the triangle pattern, thus looking back towards trendline support (currently 94.96).

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