A look ahead to non-farm payrolls

November’s non-farm payrolls data may have missed expectations, but it wasn’t enough to deter a year-long rally for both US stocks and the US dollar with bulls continuing to push both higher.

US flag
Source: Bloomberg

Ahead of Friday’s print – which is expected to see 230,000 jobs added in November, compared to the previous level of 214,000 month-on-month, as well as an expected move higher in US average hourly earnings of 0.2% – both the US 500 and US dollar are coming off year-to-date highs. Is the trend your friend, or has the steam finally run out of the rally?

The non-farm payroll number may well be losing its impact on the markets as a measure of economic health in the US, following Janet Yellen’s previous desire to use unemployment, expected to remain steady at 5.8%, as a benchmark of slack in the economy, and thus time a possible rate hike.

However, Ms Yellen has already stated that she believes that the US labour market is not as strong as headline numbers indicate, confirmed by a steady decline in the participation rate which currently stands at 62.9% – its lowest level since 2004. As a result, markets have seemingly called her bluff and have begun to temper expectations of a rate hike, which has seen a decline in interest rate futures.

The bullish move in the US dollar, which has seen the currency index gain 10.9% since its May low, seems more to do with the levels of discomfort the market has with a global deflationary environment. This has since been exacerbated by a continuously bearish market in commodities, thus calling global growth into question and resulting in a flight to safe havens, as the US continues to emerge as a market leader. The previous GDP number was posted as 3.5% quarter-on-quarter, beating expectations of 3%.

In equity markets, the US 500 has tapered off from its 27 November high of 2076, seeing its relative strength index reading moving back into expansionary territory. If expectations are met, this is likely to result in the US equity bull market aiming to post a fresh record high. Intermediate topside targets appear at 2103.4.

Should the number disappoint, it’s not likely that there will be an all-out bearish move to the downside, given the overriding bullish trend in the wider macro data; instead a re-testing of a previous level of resistance-turned-support could be in play, at 2042.3.

As always it pays to focus not just on the headline number, but also on any revision to the previous number. 

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