Fundamental Fun with Orbex – November NFP

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This week’s major event is the release of US November Non-Farm Payrolls, scheduled for release at 8:30 EST (14:30 CET), which comes with a truck-load of employment data that is very important leading into the last FOMC meeting of the year. Here are some things to keep in mind when considering this event and how it can impact currency markets.

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Non-Farm Payrolls

The star of the event, as the title suggests, covers the total number of jobs created in the economy last month, excluding farming (because they are seasonal), along with government and nonprofits. It is the best measure of the underlying employment situation, key in the second part of the Fed’s dual mandate.

When analyzing the results, there are two factors that we need to keep in mind for how they might influence markets. The first matter is employment.

If businesses are hiring more people, it’s a sign that they expect the economy to continue growing and need more workers to meet demand. A better economy is good for dollar strength. 

The other issue is inflation. If more people have jobs, and are making more money, they have more disposable income increasing demand, and that could put upward pressure on inflation. That would be seen as weakening the dollar. On the other hand, if inflation is getting out of hand, then the Fed is more likely to intervene and raise rates, which would be seen as strengthening the dollar.

While the headline number gets all the attention, the revision of prior months can also move the markets, especially if the headline is in line with expectations. 

Last month’s release saw the number revised down for the second time in a row from +134K to +118K, but part of that could be due to the effects of hurricanes. That won’t be the situation this time around; and given how high it was, a revision to the downside (third in a row) wouldn’t be all that much of a surprise.

For a while now, the consensus of what a “normal” NFP looks like is within a range of 180-200K; numbers significantly above that seen as very good, while below that range are seen as unexpectedly negative – with the market expected to react accordingly. 

For the upcoming release covering November, expectations are for +200K compared to last month’s knock-out +250K.

ADP employment change used to be seen as predictive of NFP, but it’s rather losing that reputation lately. For reference, their numbers released on Thursday (a day later than usual due to unexpected Washington closure on Tuesday for former President George HW Bush’s memorial) showed 179K jobs added compared to 195K expected and below the 227K of the prior month.

Average Hourly Earnings

The second important number to be released at the same time is the Average Hourly Earnings, surveying non-farm workers salaries. It is seen as relevant to inflation (rising wages imply more demand), and a sign of how tight the market is. It’s closely followed by the Fed, so of course, it’s also closely followed by the markets.

Consensus expectations are for average hourly wages to have increased by 3.1% year over year, compared to +3.1% registered in the prior month. As discussed above, higher wages imply higher inflation; lower wages could lead to less inflation.

Unemployment rate

Typically the unemployment rate gets more attention from the media and politicians than it does the markets, which usually focus on the components and underlying data. It can still move the market, though, especially if other data is in line with expectations. Current consensus is that the unemployment rate will stay steady at 3.7%.

The market can be influenced by the components of the data since employment trends in different sectors of the economy can give some important insight. It also can help explain why the headline missed, and calm concerns about numbers coming in out of line.

Among the components that are likely to get extra attention this time is construction, with focus on the housing industry once again. October added 30K construction jobs, bang in line with the monthly average so far this year.

The market moves

 

There is a lot of data coming out at once, and it can take a few minutes for the markets to process and adjust to it, and often some of the data will point in opposite directions. Consequently, it’s normal to have quite a bit of volatility in the minutes immediately after the release which later subsides into the trend going forward.

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