Nonfarm Payroll & Other US Employment Data

Jarratt Davis

Special Consultant to the FPA
Today we are awaiting for US Nonfarm Payroll, Unemployment Rate and Average Hourly Earnings data. It will be released at 1:30am GMT. This release always has the capacity to cause massive volatility in financial markets. Given there are three separate and important metrics, there can be moves in both directions if one figure comes out better while another figure worse. We will be looking for matching deviations across all three metrics in order to prompt a trade on the USD.

This data release shows three key employment metrics: Nonfarm Payroll (Non-Farm Employment Change) measures the change in the number of employed people during the previous month, excluding the farming industry. This is vital economic data released shortly after the month ends. The combination of importance and earliness makes for hefty market impacts. Job creation is a leading indicator of consumer spending which accounts for a majority of overall economic activity. The Unemployment Rate measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month. Although it's generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour-market conditions. Unemployment is also a major consideration for those steering the country's monetary policy. Average Hourly Earnings measures the change in the price businesses pay for labour, excluding the farming industry. This is a leading indicator of consumer inflation because when businesses pay more for labor the higher costs are usually passed on to the consumer.

The majority of Fed members, including Chairwoman Yellen, are adamant about a raising rates at the next meeting, on December 16. Fed Funds futures are pricing a nearly 80% chance of a hike at this meeting. Given the recent language of many Fed members, it's safe to say that unless there is some major shock to the economy between now and December 16, the Fed will raise rates. While a small miss on this figure most likely won't be enough to deter the Fed from December liftoff, a solid beat on already robust expectations will see a December hike all but priced in.

This week's ADP report beat the highest estimate which is a positive sign for the government release. Last month's NFP also beat expectations across all three main components and saw the USD boom.

Expected Market Reaction:
If there are positive deviations on all three then we will look to buy the USD and if there are negative deviations across all three then we will look to sell USD. One very important aspect to remember is that the dollar has rallied a lot in the last 18 months and the first rate hike is somewhat priced in already, this means that the market may not simply continue buying dollars following a good beat on expectations, although we would expect at least a short term rally. The move will of course depend on the extent of any deviations.

These releases were also covered in weekly risk events video. You can watch it here.

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