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Non-Farm Payroll look-ahead

By David Morrison  |  08/03/2018 14:30
This article considers Friday's US Non-Farm Payroll release - what's expected and how markets may react

ADP beats expectations again 

Yesterday we saw the release of the ADP Non-Farm Employment Change.  This is a measure of payrolls in the private sector and last month it rose by 235,000 – comfortably above the 199,000-consensus expectation. This marks the third consecutive month in which the ADP number has beaten expectations. But unfortunately, the ADP is a poor predictor for the official Non-Farm Payroll (NFP) release due out tomorrow.

No read-through to NFP

For a start, the NFP is far more volatile than the ADP and shows large month-on-month swings which are generally ironed out in the ADP. Additionally, the ADP has failed recently even when it comes to predicting the overall direction of travel in NFPs. There was a time when a particularly strong (or weak) ADP was later reflected in payrolls – for some reason this is no longer the case.

Average Hourly Earnings in focus

Despite yesterday’s strong ADP number, the consensus expectation for Non-Farms has been unaffected with analysts looking for a monthly increase of 200,000 – unchanged from last month’s update. But, in the absence of a substantial miss to either the upside or downside, this will be of lesser importance than Average Hourly Earnings. It was last month’s +2.9% year-on-year reading (way above the 2.6% expected) which triggered inflation fears. This in turn catalysed a jump in stock market volatility, a surge in bond yields and the plunge in equities. Another strong wage growth number will add weight to the argument that the Fed is in danger of falling behind the curve when it comes to tightening monetary policy, particularly given the low rate of US unemployment which is expected to drop to 4.0% - its lowest level in over 17 years. Consequently, this will only increase the probability that the Fed will opt for four 25 basis-point rate hikes this year, rather than the three predicted by the FOMC back in December. Conversely, a moderation in wage growth will give stock market bulls an excuse to push US indices higher and retest resistance hit back in mid-February.

Stock indices still vulnerable

But worries about Trump’s hard line on tariffs, the prospect of trade wars, Gary Cohn’s resignation, unfunded tax cuts and proposals for infrastructure spending are all taking their toll on market sentiment and adding to fears that inflation is taking off. There’s also a feeling that new Fed Chair Jerome Powell is less concerned than his predecessors in keeping a floor under the stock market. If there is such a thing as a “Powell put” the concern is that the strike price could be way lower in percentage terms than anything offered by Yellen, Bernanke or Greenspan.
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