The market consensus is for the economy to have added around 97K jobs for the month of October, with the unemployment rate remaining at 9.1%. That would come close to matching the figure we had in September, when the economy added 103K jobs.
In order to ascertain what we think about the report, lets consider the other labor market data on hand.
What Have the Other Labor Market Indicators Told Us?
#1) Jobless Claims – Hovering at 400K, Better Than in September
During this time – the month of October – we have seen jobless claims hovering just above the 400K area, with today’s data showing claims falling below 400K.
During September therefore the number of jobless claims averaged a higher number than they did during October. Therefore it could be reasonable to expect October’s NFP job figures to be as good or better than in September.
Jobless claims measure the new amount of firings, as the index counts the number of new claim for unemployment insurance. Therefore, just because firms are firing less, doesn’t necessarily mean their are making new hires.
#2) ADP Report Points to Similar Reading to September
The ADP report released on Wednesday showed an increase of 110K for October, following a 116K increase in September.
The ADP is a private company’s measure of private sector employment – it does not include government workers.
The nonfarm payroll report has been generally weaker than the ADP report because government workers have been averaging around 25K-30K losses in the past year as governments are squeezed by a shrinking budgets. If we subtracting around 30K from 110K, we get a figure of around 80K.
The ADP report has been volatile has matched the NFP report fairly well over the last year, but it did miss by a decent margin several times. The fact that the ADP figures points to consistency from September to October, means that the forecast for some consistency in the NFP report seems also reasonable.
#3) ISM Employment Sub-Guages Point to Gains in Employment in October
Another piece of data that helps us us to examine the US labor market and employment situation is to take a look at that ISM manufacturing and services indexes’ employment sub-gauges. Phew, that’s a mouthful…
We can see that in the services sector, the employment sub-gauge rose from 48.7 to 53.3, a significant increase that put the index from below 50. and in contractionary territory, to above 50 showing expansion.
In manufacturing, the employment sub-gauge eased back slightly to 53.5 in October from 53.8, but since it remains a good deal above 50 it too points to an expansion in employment (hours and jobs).
The ISM reports should reinforce our belief that the NFP figure should be as good as in September, if not better. If we put more weight to the big change in services, we could weigh our bias more towards a better than expected release.
Scenarios for the October NFP Release:
Scenario #1 – Worse Than Expected: A worse than expected reading, job growth on only 75K or lower and/or if the unemployment rate increases from 9.1%, would show that despite the pickup in growth in the third quarter seen in the macro data and by the Fed in its statement, the economy’s recovery remains fragile, and the Fed would be seen to further be under-shooting its employment mandate. That would increase the chance of more quantitative easing from the central bank which would be a USD negative.
Scenario #2 – Status Quo Release: A status quo reading, showing 90K-100K jobs created, would show that the recovery – while not faltering and dipping back into recession- continues to grow too slowly to bring down the unemployment rate, which is stuck above 9%.
Scenario #3 – Better Than Expected: If the jobs figure comes in better-than-expected, 120K jobs or more and/or a drop in the unemployment rate, that will be a a boost to the prospects of the US economy. It should help to strengthen and bolster risk appetite, and therefore equities, commodities, and higher-yielding currencies should benefit. Positive risk sentiment would be negative for the USD, but since it also lessens the chance that extra Fed stimulus will be needed, it’s also and advantage for the USD from a fundamental perspective. Monetary policy is very attuned to the “weakness” in the labor market.
Risk sentiment will also be focused on the G 20 summit, so we’ll have to way other factors to go along with our nonfarm payroll report. However looking at the next few weeks, which way the labor market goes in the US is a key factor to deciding the fate of the Fed’s monetary policy.
Should We Expect a Positive Surprise?
From examining our other employment indicators, the chance of an upside surprise carries a a higher probability – from our humble opinion – compared to a downward surprise, though most likely we get a figure close to the consensus. A status quo figure will be enough to keep the Fed from undertaking monetary stimulus, but weak enough to keep the economy trapped in a slow-growth trajectory. A positive surprise however – especially if joined with some form of positive steps at the G20 over Europe – could be the fundamental catalyst for another round of risk appetite.
Reaction: NFP’s Importance in Setting a Tone for Market Sentiment for the Month
The previous two nonfarm payroll reports have had very strong ramifications for currency markets and general risk sentiment.
#1) August Non-Farm Payroll Ushers in Risk Aversion
Back on 09/02/11, the August NFP showed a flat zero reading. That report coincided with other weaker macro US data as well as the downgrade of the US credit rating, and it created the catalyst for a sharp decline in equities during the beginning of September as risk sentiment was very poor. The poor NFP report set a tone for the month that saw heavy risk aversion throughout.
#2) September’s Non-Farm Payroll Boosts Risk Sentiment
As the data improves in the US and we got to the 11/07/11 release of the September jobs report, we saw a much better than expected release, with 103K created (forecast of 50K) and the data for August showed an upward revision to 57K. The report helped boost confidence in equity markets, ad along with some positive developments in Europe, October saw a very strong rally.
The nonfarm payroll report in both cases – for September’s and October’s price action – set a tone for risk sentiment that carried through for that month. It’s that type of importance that makes the NFP report so closely monitored by market participants. We therefore want to see what the result means for risk sentiment, not just on Friday, but heading forward the rest of November.
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