US jobs preview: Solid report expected with December rate hike looming
- Conflicting signals, but a 'good' inflationary report expected
- Fed's December hike will remain probable, but November is not likely
- EURUSD sits in a triangle, with downside penetration more probable
- The longer-term cycles begin to look discomforting
By Juhani Huopainen
The September US jobs report (1230) is the week's most-expected data release, and while it pales in comparison to the GBP's flash crash, US ISM non-manufacturing survey and the political uncertainties surrounding the Brexit, the US presidential elections, Deutsche Bank and numerous other areas, it is still a vital data release.
Because the jobs data is what will either make or break the December rate hike. Unless "once-a-year-Yellen" is planning on becoming "once-a-cycle-Yellen", the US Federal Reserve will have to begin moving fast on the second rate hike. There might not be much time. The economic cycle top might be closer than we realise. Maybe we've already passed the peak.
The non-farm payrolls are expected to have increased by 170,000 in September, according to the median forecast. That is slightly higher than August’s 151,000, but still a bit weak given the level of job gains we’ve become accustomed to during the past five years. As the unemployment rate approaches previous cyclical lows (4.9% expected for September, unchanged from August), decreasing payroll gains is what one would expect to see.
Payroll changes still moving within a range, unemployment rate close to lows:
Labor force participation rate seems to be bottoming out:
For the Federal Reserve and traders, the key question is whether the job market developments justify a rate hike later in 2016. Currently the implied probability of a rate hike in December is around 60%. A slowdown in payrolls is not necessarily enough to stop the December rate hike, as almost-full employment is already lifting average wages and inflation.
Wages, inflation already rising but unlike earlier, slow rate hikes:
The same chart but zoomed in:
So what are the usual early warning indicators saying about today’s report?
Jobless claims: modest upside surprise
The four-week average of weekly jobless claims is now 253,500 – the lowest since 1973. Usually, lower jobless claims are associated with higher payroll gains. The relationship is not straightforward, as some structurally unemployed people might not be eligible for unemployment benefits. While they do not show up in jobless claims numbers, they are still very much without a job.
ADP report: modest downside surprise
The September ADP jobs report was published yesterday and showed the economy adding 154,000 jobs – less than the median expectation of 166,000, and less than the 175,000 reported for August. If the two were perfectly correlated, we should be expecting a payroll increase of 150,000 today. That would be a small shock for the rate-hike expectations. Unfortunately, also here the relationship between the ADP and the establishment numbers is not perfect.
ADP is tidier of the two, but only includes private sector workers:
The establishment report tends to be much more volatile and suffer from monthly spikes. While the ADP report might actually be more worthy to look at, investors prefer to trade based on the establishment report. We do not see the same financial asset price volatility around the release of the ADP report, and I haven’t seen a good explanation why this would be so.
ISM survey: big upside surprise
The non-manufacturing ISM survey for September was way better than expected. The consensus view seems to be that there now exists a large upside risk to the payrolls, but unfortunately this also implies that investors might be disappointed if the payroll gain does not exceed earlier median expectations.
On the other hand, investors should therefore be able to handle a worse-than-expected jobs report, as the ISM survey would suggest more hiring in the coming months.
Longer-term, peak already reached?
It’s the longer-term picture that worries me. The long-term chart shows the monthly rate of payroll increases from a year ago. It looks like a sine wave, where we’ve just passed the cycle peak and are on our way to much lower levels, perhaps even negative territory.
The minute the payroll change begins decreasing, the Fed has eased. But not now:
The EURUSD has been carving a descending triangle for the past two months, which usually tend to break to the downside. As the pair is still closer to the longer-term trading range's upside (1.15 or so) rather than the downside (1.05), there is more room on the downside. My original argument was that the December rate hike odds will slowly climb toward 80% as economic data remains supportive of a hike, which should strengthen the USD. US presidential elections and the European Central Bank's unexpected announcements could break this scenario.
Daily EURUSD candlesticks show a triangle and the key three levels:
The same setup but with hourly candlesticks:
See also Saxo Bank’s Head of FX Strategy John J Hardy discuss the jobs report:
Why Friday's US jobs report is a key test for USD: Hardy