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Non-Farm Payroll look-ahead

By David Morrison  |  02/08/2018 15:11

This article looks at the current expectations for Friday's Non-Farm Payroll release together with the Unemployment Rate and Average Hourly Earnings

This Friday sees the release of US Non-Farm Payrolls (NFP) for July. We’ll also get an update on the Unemployment Rate and Average Hourly Earnings.

190,000 expected

The consensus expectation is for a gain of 190,000 in the headline number, pretty much what was forecast this time last month. Last month, June’s payrolls came in better-than-expected at 213,000 with an overall upward revision to the prior two readings of 16,000 jobs. So, this time round analysts anticipate a modest softening in the NFP data. However, if it comes in as expected, the six-month rolling average will still be a healthy 200,000.

Unemployment near 17-year low

Meanwhile, the Unemployment Rate is forecast to dip back to +3.9% after nudging up to 4.0% in June. This means the headline unemployment number continues to hover around levels last seen at the end of 2000.

Rising wage pressures?

But once again, traders will be keeping a close eye on Average Hourly Earnings. The expectation is for the month-on-month reading to push back up to +0.3%, from +0.2% previously. This will be enough to keep the year-on-year unchanged from June at +2.7%. If these numbers were to come in higher than expected, it would once again spark fears that wage pressures were picking up amid a tight labour market. This has two main consequences. Firstly, it raises concerns that corporations’ costs will pick up, leading to a revaluation of equities going forward. It’s already going to prove difficult for companies to post strong earnings growth for the rest of the year, given the exceptional strength in the last two quarters of 2017 which puts pressure on the year-on-year comparisons. But a pick-up in wage costs will make life even more difficult, unless there’s a commensurate pick-up in revenues. This looks unlikely given the disappointing second quarter forward guidance that we’ve had so far – see Facebook and other tech stocks, for example.

Fed reaction

The second consideration is how signs of building inflationary pressures may influence the Fed with reference to future monetary tightening. On one hand, the Fed’s FOMC has made it clear that it’s prepared to tolerate inflation (as measured by Core PCE – currently +1.9%) overshooting its 2.0% target for some time. This implies that the Fed won’t be in any rush to accelerate its current programme of rate hikes, nor dial back on balance sheet reduction, even if inflation does push above target for some time. But on the flip side this also means that the Fed will be encouraged to go full steam ahead with its current programme of monetary tightening. Bear in mind, this week the Fed released a notably hawkish statement following its monetary policy meeting. The US central bank upgraded its view of the economy from "solid" to "strong” and downplayed the steady flattening of the US Treasury yield curve.

Good data bad?

But while the US economy is growing at a fair clip, with second quarter GDP coming in +4.1%, there are concerns that the Fed is tightening too aggressively for this stage of the business cycle. All the talk from earlier this year of synchronised global growth has died down with emerging markets in retreat, feeble growth across the euro zone, UK and Japan, together with the ongoing slowdown in China. Add in the US/China trade stand-off with more tariffs coming in on Chinese exports to the US and there’s plenty to worry about. Yet the Federal Reserve under Jerome Powell appears determined to tighten monetary conditions, and strong economic data will only reinforce this view. We may be back in the topsy-turvy world where good data is bad for risk assets. But then what happens when it turns bad enough to stop the Fed from raising rates further?
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