Non-farm payrolls look ahead

Last month’s non-farm payrolls report proved to be a vindication of a kind for Federal Reserve chair Janet Yellen. 

Janet Yellen
Source: Bloomberg

While the headline number wasn’t particularly stunning, the drop in the unemployment rate and steady growth in wages meant that her thesis of reducing slack (ie spare capacity) in the US economy was being proven. 

Economic overview

Looking ahead to this month’s numbers, we’re looking for a repeat performance, with stronger growth on the overall non-farm number as well. The current trend in NFPs is as below:

We can see that payroll growth in the final months of 2015 was very strong, but that the first number for 2016 was much weaker.

However, with the US unemployment rate now below 5%, it seems that this is more due to an overall improvement in the employment picture:

At her recent testimony to Congress, Fed chair Janet Yellen was quite modest about the better situation for US workers, but it seems fair to note that her expectation that the slack in the employment situation is being reduced, as part-time jobs translate into full-time ones, and the growing scarcity of jobs puts upward pressure on wages.

Looking ahead to this month’s report, we currently expect 151,000 jobs to have been added, combined with a rise in earnings of 0.2%, while unemployment holds steady at 4.9%. This latter figure is weaker than the 0.5% seen in January, which may be disappointing, but still conforms to the idea of a better situation for US employment.

So far, weakness in manufacturing does not appear to be spreading across the rest of the US labour force, so gains in sectors such as services may help to offset continued job losses in manufacturing, oil and raw materials.

Market Outlook

Market reaction will still be centred around the dollar. The dollar basket has seen an impressive bounce off the lows of February, in line with what we have seen in equity markets. Essentially, the rising greenback indicates that markets expect at least one more rate increase this year, having sold the currency heavily at the beginning of February when it seemed that December 2015’s move was going to be the only one of its kind. With this bounce now some two weeks old however, it may prove difficult to sustain, especially if the NFP print is weaker than expected.

As a result, we may see some EUR/USD strength come into play, as the euro rises ahead of the ECB next week, paring some of the losses sustained since mid-February. A move above $1.09 would be regarded as a positive development, so long as support around the late January level of $1.08 holds. If $1.09 is taken out then the pair may move on to test the 200-day simple moving average at $1.1045. 

Further to this, a poorer NFP number will push equities into a modest correction that will, from a longer-term perspective, help to unwind some of the big rally from the mid-February lows. This is unlikely to last over the longer-term however, given ongoing bearish sentiment readings and record cash levels among fund managers. We may see a dip towards the 50-day SMA at 1933 on the S&P 500, but as long as it holds above 1900 dips are likely to prove to be more likely buying opportunities than indications of a longer-term top:

With the Fed still generally expected to tighten policy further this year, the importance of the jobs report is somewhat diminished, but it will be a key moment in providing market direction over the next few weeks, as we look back on a strong rally in stock markets and wonder if it can continue into the rest of March. 

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