Non-Farm Payroll look-ahead

By David Morrison  |  01/11/2018 15:38

Friday sees the latest US Non-Farm Payroll release, but once again traders will focus on Average Hourly Earnings and the implications for inflation going forward

The last few trading sessions have seen a sharp rebound in US equities. This has helped to lift European and Asian Pacific stock indices as well, although the gains have been less dramatic.  Yet despite this late rally, overall October brought dramatic falls across all major global indices. Many continue to trade below their respective 200-day moving averages, indicating that there’s still some technical damage which has yet to be reversed.

Sell-off comes to an end?

Nevertheless, a significant number of market commentators have been quick to assert that the worst is over. They point to the second successive quarter of strong US GDP growth and another earnings season which has seen many corporations post better-than-expected earnings. There’s also a belief that the Federal Reserve will hold off from hiking rates again in December should there be a resumption in the market sell-off. Add in the Trump administration’s corporate tax cuts, low unemployment, inflation (as measured by Core PCE) bang on the Fed’s 2% target rate and the stage is set for a resumption of the bull market to take us into year-end.

Worries persist

But other analysts are worried that the Fed under the chairmanship of Jerome Powell is quite different to that under the stewardship of Janet Yellen and Ben Bernanke. What if the current Fed is less concerned about supporting the stock market (which is still looking expensive by many measures) and more concerned in pushing rates up further to build ammunition for the next recession? What if US growth and corporate earnings have peaked? Whatever investors may say to the contrary, the US doesn’t operate in splendid isolation in this globalised world. Chinese growth is slowing, not helped by US tariffs. In addition, US GDP will be flattered by infrastructure repairs and rebuilding after several devastating hurricanes. On top of this, the next few quarters of corporate year-on-year comparisons will struggle to impress given the stunning earnings and revenue growth seen in the fourth quarter of 2017 and the first half of this year. Also, this earnings season has seen market-leading companies such as Alphabet and Amazon disappoint on sales with the latter also giving some downbeat guidance for the fourth quarter. All this comes before even mentioning the uncertainty ahead of the US mid-term elections next week.

Non-Farm Payrolls

But the next big market event is Friday’s US Non-Farm Payroll release for October. The consensus expectation is for a rise of 193,000. If so, this would be well above the disappointing 134,000 recorded in September on expectations of 185,000. If Friday’s payrolls come in better than anticipated, this will reinforce the view that the Fed will hike again in December and this should support the dollar. But in the absence of a big surprise on Friday, all the focus will be on Average Hourly Earnings. These are expected to rise by 0.2% month-on-month, a slight moderation from September’s 0.3% increase. But it is the year-on-year figure which could capture the headlines.  Analysts are expecting this to come in at +3.1% - well above September’s 2.8% increase. This would be quite a jump, particularly if put into the context of the rally in US Treasury yields, surge in volatility and plunge in global equities which followed January’s jump to 2.9% from 2.5%. Admittedly, a move to 3.1% from 2.8% is smaller in actual and percentage terms. But if wage growth comes in much stronger than expected, we could see a similarly negative market reaction, particularly given the current unsettled atmosphere.

Inflation fears

An increase in the rate of wage growth raises concerns that it will add to inflationary pressures. This would reinforce the view that the Fed will go full steam ahead with the 100-basis points-worth of rate hikes it has planned between now and the end of next year. In addition, it has an impact on corporate earnings as wages are generally a company’s biggest overhead. It goes without saying that investors will breathe a sigh of relief if tomorrow’s data comes in as near as possible to expectations.
 
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