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US NFP Preview: How Many is Enough for the Fed?

Overall comments from senior Federal Reserve officials suggest that they want to raise interest rates in September, but will want another solid employment report to help justify the move. Futures prices indicate a tightening this month is nowhere near being priced in and there is the potential for big dollar gains if there is a strong data above 225,000. The net risks actually point to a weaker than expected report but, given that the Fed is looking to raise rates, there is also a strong case on a risk/reward basis to buy dollar dips and sell Treasury gains on any moderately disappointing payrolls growth in the 150,000 area. Anything below 100,000 and the dollar will get caned on a short-term view.

Last month’s headline increase in non-farm payrolls employment report was again stronger than expected at 255,000 following a revised 292,000 gain for the previous month.

The very weak May data and June strength tended to cancel each other out and the July strength was potentially more important.

This month’s US employment data will certainly be crucial for expectations surrounding Federal Reserve policy with a particular focus on this month’s meeting. Consensus expectations are for a payrolls increase of around 180,000 with a 0.2% increase in earnings and 4.8% unemployment rate.

The July Federal Reserve Open Market Committee (FOMC) minutes indicated that some members already considered labour-market trends strong enough to justify an early move to raise rates. The majority of members wanted to see more data and they have already had the strong employment release for July.

Comments from chair Yellen on and vice-chair Fischer last Friday clearly indicate that the FOMC has moved closer to a hike given the overall balance of indicators.

Other labour-market data has remained robust with the August ADP report registering a 177,000 gain in private-sector employment from a revised 194,000 gain previously, while jobless claims remain at very low levels around 265,000.

There was disappointment in the latest ISM manufacturing data, which moved back into contraction with employment also declining, although the ISM index was also in contraction territory when the Fed raised rates in December 2015.

Historically, the August data tends to undershoot expectations and there are seasonal adjustment issues in the Sumer period. There are also concerns that an early survey cut-off date will dampen potential average earnings growth.

The average earnings data will also be very important for expectations surrounding inflation and will continue to be a key metric for the Federal Reserve, especially given recent references to wages by Fed speakers. The Fed will be looking for higher earnings as a key indicator of tightness in the labour market and a signal that overall inflationary pressure is liable to creep higher. A strong earnings figure and lower unemployment would substantially boost the case for a September tightening and would take precedence over a slightly disappointing employment gain.

The unemployment and participation rates will also be watched closely within the data given the proximity to full employment.

Overall, the argument has shifted and a majority on the FOMC could well be committed to making the move in September unless the employment data is extremely weak.

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Preview from Goldman Sachs for the NFP

  • Expect +165k (Bloomberg consensus is 180K)
  • Unemployment rate to fall to 4.8% (Bloomberg consensus is also 4.8%)
  • Average hourly earnings flat for August, up 2.3% over the past year (Bloomberg consensus is+0.2% m/m/ and +2.5% y/y)
GS note:
  • Since 2011, August payroll growth has fallen short of Bloomberg consensus expectations by an average of 49k, only to be revised up by an average of 71k in subsequent releases
And note, Westpac have made the same point, post is here: Westpac warns to beware of an NFP disappointment
  • The first release of the August number is often weaker than expetced and then revised higher subsequently ... often quite substantially .... "The average shortfall to consensus in the last 5 years has been -49k"
 
  • TD Securities expects the August labor market report to represent rather the downside risk to the market. TD's analyst expect total number of non-farm payrolls in August to reach 153,000 compared to the 180,000 consensus forecast. Average hourly earning are forecast to stagnate in August and the unemployment rate is expected to reach 4.8%.
  • Market Securities's Christophe Barraud expects the US jobs creation to slowdown to 172,000 in August. "Employment increased only slightly during August. Furthermore, it was the weakest rate of payroll growth seen for four months". On the other hand, "the rate of job creation was solid and picked up to a three-month high" in the service sector. Flooding hit Louisiana on August 12 during the survey period which could lead to less job creation
  • ANZ Bank analysts noted that A stronger US labor market isn't necessarily new ‘news’ for the Fed or its watchers, as it has been pretty solid for some years now. The worry for some Fed officials remains an absence of a generalized pickup in inflation. Thus a relatively large outturn relative to expectations, along with more evidence of a pickup in wages, is probably needed to get the market thinking of a near-term hike from the Fed.
  • Nomura economists expect non-farm payrolls to increase by 200,000 workers in August. Nomura economists add that "in the last five years, the first estimate of August non-farm payrolls has shown some downside bias but we do not know of any statistical reason why there is a bias in the August data and have found no compelling evidence to suggest that the non-farm payrolls in the aggregate suffers from residual seasonality like some other indicators (e.g., GDP) have in the past. Nevertheless, we see it as a downside risk to our forecast."
  • Deutsche Bank economist Joseph LaVorgna projects "a 160,000 increase in August non-farm payrolls and a 150,000 gain in private sector hiring, which are "below consensus estimates."
  • Allianz Global Investors' Mohamed El-Erian sees an 80% chance the Fed raising interest rates in September if Friday's jobs report comes in strong (meaning more than 200,000).
  • FTN Financial's Jim Vogel noted that "just spent a month gearing up for a more aggressive Fed" so it "will take a lot of convincing from August data for traders to back away from the impression of strong economic growth" from June, July reports.
  • Mitsubishi Financial Group's John Herrmann forecasts total August non-farm payrolls up near +184.2K over the month; if "accurate," Sept rate hike odds "may rise in the markets, provided the other details of the employment report are not horrendous."
  • Amherst Pierpont Stephen Stanley noted that the "first print" on Aug jobs "tends to be weak (with a pattern of subsequent upward revisions)"; though doesn't "rule that out," expects "clean" reading, "nearly +200K" Aug jobs.
 

August NFP: Not Strong Enough For A September Hike


Overall, the August jobs report was not strong enough for the Fed to hike at the next meeting in September, especially not after the very weak ISM report released yesterday, with the index falling below 50, indicating a contraction in the US manufacturing sector.

Although our view is that the Fed will stay on hold until H1 17, we cannot rule out a hike later this year, most likely in December following the presidential election, if we see some recovery in the US activity data and continued decent jobs growth in coming months.

One main reason we moved our expectation for the next Fed hike to next year was due to Brexit but, so far, the economic impact of Brexit has been very limited in the rest of Europe and the US. Still, as we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely, although some FOMC members (especially non-voters) appear to be eager to get going with the hiking cycle. The Fed can afford to stay patient, as GDP growth has been just around 1% for three consecutive quarters, PCE core inflation is still below 2%, inflation expectations (both survey based and market based) have fallen and wage inflation is still subdued.

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A preview of the September NFP report (in brief) from Goldman Sachs

  • GS are looking for a +190k headline (the Bloomberg median consensus forecast is +172K)
  • GS say the trend growth rate in payrolls still looks solid
Our above-consensus payroll forecast primarily reflects improving underlying labor market fundamentals during the course of the month. Initial jobless claims continued trending down towards post-crisis lows, and nearly all other employment indicators from the various regional and national manufacturing and service sector surveys turned up.
  • For the unemployment rate GS forecast 4.8% (compared with a Bloomberg median consensus forecast of 4.9%)
  • Average hourly earnings +0.3% m/m and 2.7% y/y (Bloomberg consensus median at 0.3 and 2.6 respectively)
 

September NFP Preview: Federal Reserve Looking For Goldilocks Employment Report


From the Fed’s perspective, an employment report close to expectations would be ideal as it would reinforce the potential for a planned December rate increase without scaring the market. Weak data would trigger a sharp correction in the dollar and Treasuries, while also unsettling equities. A very strong release would put the Fed in a very difficult position and risk an aggressive sell-off in bonds with the Fed seen behind the curve. Best value is likely to be in fading Treasury gains on a slightly weaker than expected release. There will also be a case for fading initial dollar gains if the report is slightly better than expected.

Friday’s employment report will inevitably have a short-term impact and could force a complete re-think by the Federal Reserve. Consensus expectations for the data are around a 170,000 increase in payrolls, with unemployment unchanged at 4.9% and a 0.2% increase in average earnings.

Market expectations surrounding the employment number will have been strengthened by the jobless claims data and the sharp rebound in the ISM non-manufacturing employment index. There was, however, a slightly disappointing reading for the ADP employment report at 154,000, which suggests the consensus estimate of a non-farm employment growth is realistic.

Revisions to last month’s data will be important, especially as August data is often initially reported as weak, only to be revised higher in subsequent months. Upward revisions would increase the tolerance for a slight miss on the headline release. The weekly hours data will also be watched closely after a weak reading last month.

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BofA Merrill: We look for another week employment report in September with only 140,000 in job growth and potential upward revisions to August. As we have previously written, August and September historically surprise on the downside and then are revised higher. We also think there is a risk that government hiring slows after relatively strong growth over the past few months. As such, we look for private payroll growth of 135,000. We look for the unemployment rate to remain unchanged at 4.9% in September.

A risk to the unemployment rate is a potential further expansion in the labor force which could boost the unemployment rate. We look for average hourly earnings to grow by a trendlike 0.2% mom, bumping the year-over-year rate back up to 2.6% from 2.4% in August. However, this remains a fairly range-bound pace of wage growth.

Barclays: We look for nonfarm payrolls to rise 200k. We expect 185k of these gains to come from the private sector, with government payrolls adding the remaining 15k. We expect the unemployment rate to decline one-tenth, to 4.8%, average hourly earnings to rise 0.2% m/m and 2.6% y/y, and the average workweek to tick up 0.1, to 34.4 hours

BNPP: The September employment report is expected to come in firm with a healthy revision to the first estimate for August payrolls. The current thrust of payrolls has been impressive with an average 175,000 jobs added over the past six months. For September, we expect about 160,000 jobs to have been added in the month - a notch above the FOMC's estimates for the rate of payrolls that keeps the unemployment rate constant.

Credit Agricole: Our estimate is for a 175K rise for September nonfarm payrolls and a decline in the unemployment rate to 4.8%.Payroll forecasts center on a range of +150K to +200k with the median at 175K. The economic release calendar leaves us with less employment-related data than normal upon which to base our forecast.  We look for the average workweek to edge up to 34.4 hours. The unemployment rate may decline to 4.8% in September, which is the Fed's estimate of full employment.

SEB: We expect a 160k advance in September payrolls. and a steady 4.9% employment rate.
 

Nonfarm payrolls rose by 156k in September, well below our and consensus forecasts, while payroll growth for August was revised modestly higher to 167k from 151k as previously reported. Employment in September was led by the services sector, where payrolls expanded by 157k, while employment in manufacturing continued to decline (-13k). Although we did not get our expected rebound in services sector employment in September, the recent strength in survey-based measures, especially the employment subcomponent of the ISM nonmanufacturing index in September, which surged to 57.7, indicates much more strength to come. Most of the miss in headline relative to our expectation came from a slowing in leisure and hospitality services employment as well as a slowing in education and health. Government employment, where we had expected a 15k rise, also disappointed falling 11k in September.

Elsewhere in the report, the unemployment rate moved higher to 5.0% amid a tick up in the participation rate of 62.9% . Average hourly earnings increased 0.2% m/m bringing the y/y change to 2.6% . The household survey showed considerably more strength in employment, posting a gain of 354k in September. In general, we discount job gains in the household survey and take slightly more signal from the establishment survey.

It is not clear to us that the labor market momentum evident in this report is fully consistent with a December rate hike, given Chair Yellen’s views on the recent trend in participation and the recent slowing trend in headline employment growth.

Nonetheless, most members will likely take comfort from the underlying details of the report along with the relative strength in wage growth. The FOMC will receive two more reports before the December meeting.

 

Employment Report, October - 8:30am 

Goldman Sachs: The week ends with the October US employment report, which we expect to show that the US economy added 185kjobs last month, 4.9% on the unemployment rate and 0.3% on average hourly earnings.

BofA Merrill: We look for nonfarm payroll growth of 170,000 in October, in line with the recent 6- month trend and up from 156,000 in September. We expect private payroll growth to have constituted 165,000 of this gain with a modest 5,000 gain in government payrolls. Our equity analysts have only seen mixed signals related to holiday hiring so far, but there have been some news reports of stronger seasonal hiring, presenting upside risk to our forecast. The underlying rate of job growth should remain robust based on our forecast for October and especially given the possibility of an upward revision to September jobs. As we argued in Nonfarm payrolls myths and realities, there tends to be a pattern of upward revisions to September in the order of about 30,000 jobs. We expect the unemployment rate to remain unchanged at 5.0% with the labor force participation rate holding at 62.9%. The labor force participation rate will be an important indicator to watch given the 0.1pp increase last month. We expect a trend-like 0.2% mom gain in average hourly earnings, leaving the year-over-year rate to fall to 2.5% from 2.6%, and we think average weekly hours will remain unchanged at 34.4.

Barclays: we look for nonfarm payrolls to rise by 175k. We expect 165k of these gains to come from the private sector – in particular, service-providing employers – with government payrolls adding the remaining 10k. Elsewhere in the report, we expect the unemployment rate to decline by one-tenth, to 4.9%, average hourly earnings to rise by 0.3% m/m and 2.6% y/y, and the average workweek to remain unchanged at 34.4 hours. On balance, overall job growth of 175k would confirm ongoing strength in the labor market. The increase in payrolls, combined with the ongoing improvement in wages, should boost household income and keep consumption on track. We also believe at these numbers employment growth is sufficient to keep the Fed on track for a December rate hike.

SEB: Our forecasts are for 190k on the headline, 185k on private payrolls, 4.9% on the unemployment rate and 0.2% on average hourly earnings. 

UBS: Private payrolls probably accelerated modestly to 175k in October, but we project headline payrolls (160k est) depressed by further payback for exaggerated education payrolls in earlier months. For private payrolls, we are assuming some lessening of factory sector weakness as temp hiring picked up in September and the ISM employment index is inching toward neutral. Average hourly earnings probably rose 0.2%m/m—on trend, and we forecast a flat workweek after last month's increase. For the unemployment rate, the result will likely be a decline to 4.9% from 5.0% although yet another rise in the participation rate is a believable alternative.

Credit Agricole: Our estimate is for a 185K rise for October nonfarm payrolls and a decline in the unemployment rate to 4.9%. Payroll forecasts center on a range of +160K to +200k with the median at 175K. The economic release calendar leaves us with less employment-related data than normal upon which to base our forecast. Regional manufacturing reports suggest stronger manufacturing hiring in October. The Kansas City and Richmond Fed surveys both accelerated while the Empire and Philly Fed surveys were each up but still negative. Although initial claims for unemployment insurance increased by 10K between reference weeks, we believe some of that to be a result of Hurricane Matthew rather than a real underlying trend. Matthew also likely depressed construction hiring in October.

BNPP: We expect a solid 180k increase in non-farm payrolls to be reported Friday, leaving the three month average of jobs creation running at 168k.

CIBC: A gain of 160K in non-farm payrolls might seem like a disappointment relative to the above 200K pace seen over the past couple of years, but it’s actually quite a healthy number. The economy only needs to create roughly 100K jobs per month to keep up with demographics. As a result, October’s print will still represent solid progress towards the Fed’s goal of full employment. If, as expected, labour force participation takes a step back after a solid gain last month, the increase in employment should result in a two tick drop in the unemployment rate to 4.8%. Wages will also continue to show progress, gaining 0.2% on the month. Overall, the employment report should add to expectations of a rate hike from the Federal Reserve in December.

Morgan Stanley: Should our economists' projection of an October US payroll gain of 205k prove correct, thus exceeding the 175k consensus expectation by a wide margin, then USDJPY should receive another boost, inspired by steeper US yield curve.

Nomura: We forecast that the Bureau of Labor Statistics will report on Friday that nonfarm payrolls increased by 170k in October. We expect no change in payrolls in the public sector, implying that private payrolls increased by 170k (Figure 1). Incoming data suggest that the economic momentum gained in September likely continued into October and the early data releases of employment indicators for October and the general trend over the past few months suggest no major change in labor market conditions. If our forecasts prove true, it would imply job gains remain steady and should continue to put downward pressure on the unemployment rate (we expect the unemployment rate to decline to 4.9% from 5.0%).

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