The US Non-Farm-Payroll (NFP) data is the most important piece of economic numbers not only for the US economy, as it also shapes the trading range for the global markets. The key reason behind this is that the Fed (over in the US) pays close attention to this number as part of their mandate. The Fed's monetary policy decision is also dependant on the health of the US labor market to a large extent.
An improving labor market usually means an increase in consumer confidence which means more stability in consumer spending. The aggregate income proxy is calculated by multiplying aggregated hours into average hourly earnings.
The Headline Figures and Its Sub-components
When it comes to the US labour market, the initial trading action is driven by the headline number: Non-Farm employment change. However, the fact is its components and subcomponents command more attention than the overall number and this makes the trend.
The components which we believe make the core of this are the following:
- The average hourly number
- The ISM manufacturing and non-manufacturing
- The ADP non-farm employment change
Forecast and Consensus
Market participants are expecting the US NFP to be at 140K, the average hourly earnings at 0.3% and the unemployment number to remain unchanged.
The Ongoing Trend
The first glance gives the impression of a delicate labor market. The recent US NFP data came in short of expectations. The reported Non-Farm employment change was 130K against the forecast of 163K while the previous number was 159K.
However, the previous month’s data did confirm improvement in the average hourly earnings. The ADP Non-Farm employment change at 250K was also robust, and the Non-Farm Productivity q/q also improved further.
In addition, we also saw the ISM non-manufacturing PMI number with a much stronger reading (56.4 actual vs forecast of 54). But the ISM Manufacturing PMI number was lacklustre (actual 49.1 against the forecast of 47.6). The ISM manufacturing PMI was week because of the ongoing trade war between the US and China and of course because of the strength in the dollar index, which has caused this weakness in the ISM manufacturing PMI.
The Tone So Far
According to this month’s US ISM manufacturing data, the economic conditions are immensely weak due to the dismal manufacturing data. It fell further deep into the contraction territory with a reading of 47.8. A level of 50 separates contraction and expansion. So far, the picture for the US NFP looks dull, but we still have two more readings due: the ISM non-manufacturing and the ADP report.
How Trump Will Act?
Trump is unlikely to be happy on Friday even if the US NFP data beats the expectations. We expect him to suggest that the Fed can make the economy much better by lowering the rate. If the economic numbers show a feeble nature, then expect a full-blown rant from the president. But we are not expecting much reaction from the markets in terms of his tweets, and this is based on the previous trend.
Expectations from The Fed
The Fed chairman, Jerome Powell, is expected to deliver a speech on Friday after the US NFP data. So far, looking at the Treasury yield curve and the odds market, speculators have increased their bets for another rate hike for this year. However, if the ISM non-manufacturing data and the US NFP comes strong, we expect the Fed to brush off the weakness in the manufacturing data and maintain their cautionary rhetoric. However, if the numbers are weak, then expect some hints for another rate cut because markets will surely be expecting some accommodative policy from the Fed.
Instruments To Focus
The US NFP can move not only the major markets but also the emerging markets as well. Under a typical scenario, a strong number could push the dollar index to another high and this means more weakness for the gold price. Strength in the dollar index would also mean that the current downward trend for the South African rand, the British sterling and the euro would continue. As for the equity markets, a strong number is unlikely to shift the sentiment needle much because it is the trade war which is the major denominator or perhaps more interest rate cuts from the Fed.