As recently as two months ago – when December rate hike odds were at or below 50% – the monthly payrolls report was watched closely for hints about the Fed’s next move. However, now that December rate hike odds are effectively 100% (CME Fed has seen a modest drop to 92.7% in recent days), what the BLS will announce today carries far less significance, and if anything attention will be mostly paid on the internals, like wage growth for clues on the Fed’s pace of hiking into 2017, and labor market participation to see how Trump may react as he talks down what is otherwise expected to be a +180K print.
Manufacturing payrolls also will matter politically. Trump had whipped up support among Rust Belt voters as he threatened to tear up trade agreements and bring jobs back from overseas. The Bloomberg survey predicts factories cut 3,000 workers in November, after slashing 9,000 the previous month. Also politically relevant will be the almost 6 million employees were in part-time jobs but wanted full-time work. Those workers, known as working part-time for economic reasons, have been little changed this year and remains above its pre-recession level. The president-elevt will also watch the participation rate, which indicates the share of working-age people who are employed or looking for work. It fell in October and is near the lowest level since 1978.
So while it will not be as market moving, algos will still have a strong kneejerk reaction to any outlier numbers, especially since coming into today’s print Wall Street itself is quite confused, with a consensus print of 180K, however derived from an especially a wide range from 140K to 250K. The other components of the report include the unemployment rate (consensus is for no change at 4.9%) and average hourly earnings (expected to rise +0.2% mom). One additional possible surprise is the impact of Hurrican Matthew, which according to JPM subtracted 30-40K jobs from the October print, and which may boost November payrolls by a similar amount.
Below are the November payrolls consensus estimates:
- Nonfarm Payrolls Exp. 180K; Prev. 161K, Oct. 191K
- Unemployment Rate Exp. 4.90%; Prev. 4.90%, Oct. 5.00%
- Average Hourly Earnings Exp. 0.20%; Prev. 0.40%, Oct. 0.30%
Here are the expectations, broken down by bank:
- Goldman: 200K
- SEB: 200K
- UOB 200k
- Consensus: 180k
- Barclays: 175K
- Credit Agricole: 175K
- UniCredit: 175K
- BofAML: 170k
- UBS: 165K
- SocGen: 165k
- Nomura: 160k
- Deutsche: 150K
As a reminder, last month’s Non-farm payrolls saw an increase by 161k and an upward revision to the September number to 191k, both figures being within the Fed’s bracket for growth. The data was followed by the FOMC, stating that most Fed officials see a hike as appropriate ‘relatively soon’ and a few of the voting members were worried that if the Fed let the jobless rate decline too low they may need to raise rates more steeply.
Via the WSJ, here are the 5 main things to look for in today’s report:
- So far this year, employers have added an average of 181,000 jobs per month. But the performance has been inconsistent—with a low of 24,000 in May and a peak of 271,000 in June. A reading close to the 180,000 consensus would signal steady hiring and more progress toward the Fed’s goal of full employment.
- Average hourly earnings for private-sector workers advanced 2.8% from a year earlier in October, the strongest pace of growth since the recession. Such gains outpace inflation and give households more money to spend, which should help broader economic growth. They are also a sign workers are able to demand better pay as the labor market gets tighter.
- The headline unemployment rate has moved close to prerecession levels this year, suggesting that Americans who want a job are able to find one. But a broader measure, which includes people stuck in part-time work and people who have stopped looking, remains elevated, an indication there’s still slack in the labor market.
- One of the most worrisome developments in recent years is a drop in the labor-force participation rate. Its decline is partly because baby boomers are retiring. But the rate for prime-age workers, 25 to 54, also has fallen, matching a three-decade low late in 2015. The rate has since been creeping up amid steady job creation and rising wages, though it remains depressed. Another tick up would show that an improving labor market is drawing more Americans off the sidelines.
- Remember Hurricane Matthew? “We believe the hurricane likely depressed the October payroll count by about 30,000 to 40,000 and think that a return to less disruptive weather could boost November payrolls by a similar amount,” J.P. Morgan Chase economist Daniel Silver said in a research note. That would be a notable distortion and could help polish November’s headline number.
Some further thoughts on today’s report from RanSquawk:
CME Fed watch are pricing in a 93.5% chance for a hike and even with an ‘anomalous figure’ the likelihood of this affecting December’s decision from the FOMC is very slim. Many analysts are now stating that it is possible for any NFP figures to once again focus on the immediate economic conditions to the report, as opposed to any impact on the longer-term monetary element. However, this report may be an indication to the rate path for 2017, with many analysts stating that 2017 could be a hawkish year, with the exceptions of 2016 coming apparent in 2017.
As the Fed reiterated, and logic suggests, data continues to dictate the state of play and November saw sustained growth (161k). Inflation is a key indicator for the US economy and this month saw Y/Y CPI above the 2.00% target once again. As November’s data has shown no shock in the US economy and growth is still evident — regardless of the political position, it is fair to say that with the Fed all but guaranteed to hike in December.
Market Reaction
As ever with the NFP release, the headline is likely to garner much of the initial focus with algorithms and fast money moves jumping on any large discrepancies. If there is an overwhelmingly strong report, the USD will strengthen across the board however, as the dollar index continues to ramp many analysts consider the dollar upside to be limited and the possible move to lookout for is a poor report, negatively affecting the USD.
With focus no longer on the Fed and rates; equity markets may once again find themselves with some volatility and a miss in expectations could cause some selling pressure following the record levels seen over the past weeks in US equity markets, with a level of note in the S&P 500 to be the 2213.10 high. In terms of other technical levels, there is an internal downtrend line which originates on 23/08/16 to the next lower high on the 07/09/16 and support likely at 2158.20.
Gold could also see volatility with price action likely to mirror treasury markets with overwhelming beats on expectations across the board set to setoff some selling pressure across flight to safety asset classes; with the 10-year T-note Dec’16 future showing clean air on the downside and if any volume is seen on the downside, traction could cause heavy pressure bolstered by light holiday volumes. Gold also paints a bearish picture with the precious metal falling since Trump’s victory, with key support being the 1170.92 low. On the upside, there are notable levels of resistance at previous support levels. The first comes at the consolidation high of 1196 and then the psychological level of 1200.
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Finally, as reported last night, this is what the bank that continues to run everything, Goldman Sachs, expects:
A series of stronger than expected data in recent days pushed Goldman Sachs to up their payrolls growth expectation to 200k (above the 180k expectations), but they note that while the unemployment rate is likely to drop (to 4.8%), average hourly earnings may disappoint. Of course, they add, any non-narrative-confirming misses on the data can likely be explained away by “weather effects and residual seasonality.”
As Goldman details, we forecast that nonfarm payroll growth increased to 200k in November, after an increase of 161k in October. We have revised up our forecast from 180k previously reflecting stronger data this week. Labor market indicators were stronger on balance last month, including improvements in reported job availability, the ADP report, and the employment components of service-sector surveys. In addition, we see a likely boost from positive weather effects and possible residual seasonality.
Arguing for a stronger report:
Job availability. The Conference Board labor differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—rose to +5.2, reversing a small decline in October. This measure has risen by about ten points over the last year.
Service sector surveys. The employment components of service sector surveys mostly improved in November. The Richmond Fed (+7pt to +13), Dallas Fed (+6.5pt to +9.2), and New York Fed (+2.2pt to +10.9, after our seasonal adjustment) measures of service sector employment all strengthened. The Philly Fed non-manufacturing employment index edged down (-0.7pt to +15.6) but remains at levels consistent with expansion. Service sector employment increased 142k in October and has increased 161k on average over the last six months.
ADP. The payroll processing firm ADP reported a 216k gain in private payroll employment in November, up from a downwardly revised 119k increase in October. While this is a significant beat, the new methodology ADP introduced last month creates some additional uncertainty around the translation of this upside ADP surprise into the outlook for tomorrow’s nonfarm payroll report.
Some rebound from Hurricane-related weakness. In October, employment in the three sectors that we find are most sensitive to weather-related swings – retail, construction, and leisure and hospitality – increased by 20k, which is a smaller gain than the 6-month (33k) and 12-month (73k) average changes through September. Among East Coast states, employment in these sectors declined by a total of 16k in October, relative to an average monthly increase of 15k over the prior six months (Exhibit 1). Some of the biggest declines were in Florida and South Carolina, the states most impacted by Hurricane Matthew.
Seasonals. Since the recession, November payroll growth has surprised consensus expectations roughly 2/3 of the time, with an average surprise of +27k.
Exhibit 1: Some Potential Upside from East Coast States Impacted by Hurricane-related Weakness
Source: Department of Labor, Goldman Sachs Global Investment Research
Neutral Factors:
Temporary election-related hiring. Election-related hiring typically shows up to some degree in the government and marketing research and opinion polling categories in the non-seasonally adjusted payroll data. However, the BLS makes a special adjustment to these changes to remove the effects of the election and in prior election years those categories did not spike on a seasonally adjusted basis in November. Therefore, it is unlikely we will see any direct election effect in the seasonally adjusted series.
Jobless claims: Initial claims for unemployment insurance benefits moved slightly higher, with the four-week moving average edging up to 253k in the November survey week. Initial claims were affected by technical factors including temporary auto plant shutdowns and weather-related effects from Hurricane Matthew, but we do not detect a significant change in the underlying trend which continues to show low layoff activity in the economy.
Job cuts: Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment increased by 4k to 32k in November, but remain close to cycle-lows.
Arguing for a weaker report:
Online job ads. The Conference Board’s Help Wanted Online (HWOL) report reversed last month’s gains, and stands 15% lower than levels last year. However, we put limited weight on this indicator at the moment in light of research by Fed economists that argued that the HWOL ad count has been depressed by higher prices for online job ads.
Manufacturing sector surveys. The employment components of manufacturing surveys were mixed in November. The ISM manufacturing (-0.6pt to 52.3), Chicago PMI, Empire State (-6.2pt to -10.9), and Kansas City Fed (-6pt to +1) employment indexes all declined, while the Dallas Fed (+4.3pt to +4.5), Richmond Fed (+2pt to +5), and Philly Fed (+1.4pt to -2.4) measures edged up. Manufacturing employment declined by 9k in the October report, and has declined by 7k on average over the last six months.
We expect the unemployment rate to edge down to 4.8% in the November report from an unrounded 4.876% in October. Last month, the household survey showed a 43k decline in employment but the unemployment rate edged down to 4.9% due to a decline in labor force participation. The broader U6 unemployment rate dropped to a new post-crisis low of 9.5% as the number of involuntary part-time and marginally attached workers both declined.
We expect average hourly earnings to increase 0.1% month-over-month, or 2.7% from a year ago, after rising to a new cycle high of 2.8% year-on-year in October. A modest retracement of last month’s gains and negative calendar effects are likely to contribute to a softer number. Our wage tracker, which captures the broader trend in wage growth across four major indicators, stands at 2.6% year-over-year as of Q3.
via http://ift.tt/2gPwDyE Tyler Durden