Jobs Data Likely in Line with Trend, but Reaction May Surprise
By Brian Dolan, Head Market Strategist
Last Major US Data Before Fed Meets
On Friday, September 4, at 0830 EDT, the US Labor Dept. will release the August employment report. The jobs data will be the last major data release before the Fed’s rate setting committee (FOMC) meets on Sept. 16-17. Markets continue to fixate on whether the Fed will finally commence with the first rate increase in nine years (lift-off) or whether they will hold their fire. The August jobs report will be an important real-time check on the health of the US recovery and the future outlook.
Broadly speaking, a report in line with or above recent jobs data is likely to see the chances of a Sept. Fed rate hike increase, while a disappointing number is likely to see rate hike expectations fall further. Currently, Fed Fund futures data indicate a 34% probability of a Fed rate hike in Sept., about mid-way in the range from early July to late August (see the chart below).
US Fed Fund Futures % Probability of a Sept. Fed Rate Hike
Source: Bloomberg; DriveWealth
Inside the Numbers
Consensus estimates are for a +218K change in non-farm payrolls (NFP) (prior +215K) and a dip in the headline unemployment rate to 5.2% from 5.3%. Wednesday’s release of the ADP national employment report registered an increase of +190K private sector jobs, slightly below the forecast +200K gain. The ADP report and other interim job indicators suggest the headline NFP change should come in around market forecasts at around +200K (+/-20K), which will indicate that the US job creation engine continues to hum along-- not too fast, and not too slow.
Monthly Change in US Non-Farm Payrolls
Source: Bloomberg; DriveWealth
In addition to the headline jobs number, average hourly earnings data will also be released. That measure of wage gains is forecast to increase at a steady +0.2% MoM (month over month) and an unchanged rate of +2.1% YoY (year over year). The lackluster rate of wage gains (core CPI inflation is running at +1.8% YoY, meaning earnings increases are barely exceeding inflation) continues to be the soft spot for the US recovery, preventing any meaningful acceleration. Continued stagnant wage growth also makes it more difficult for the Fed to conclude that the US will reach the Fed’s inflation objective, potentially giving them further cause to pause.
Big Picture Reaction
While markets and investors tend to obsess over the monthly US jobs data, the Fed has to take many other factors into consideration, not the least of which is the darkening global outlook. While the August jobs number may be in line with or even better than recent months, the Fed will be most concerned with the future course of the US economy. And there I think the risks are decidedly skewed to the downside given increasing international headwinds. As a result, markets may conclude the Fed will look past the August jobs report, since it won’t reflect the most recent surge in global uncertainty. The resulting market reaction could then be extremely convoluted.
For instance, a consensus jobs report (e.g. +200K) could see rate hike expectations initially surge higher, only to later reverse as investors think twice about the Fed’s most likely course of action in light of international developments. A below consensus report will almost certainly see rate hike expectations fall further. The market reaction will also likely be distorted by the US Labor Day holiday, which may see liquidity thin out earlier on Friday ahead of the long weekend. (Lower liquidity can see volatility increase.)
Investors would do well to keep an eye on the US dollar and US Treasury rates following the data release to gauge how other markets will react. US Treasuries and currencies will be in full swing when the data is released, while US stock markets won’t open until an hour later. Higher US yields and a stronger US dollar (especially against the JPY) will reflect an increase in rate hike expectations, and vice versa. The stock market reaction could be more nuanced depending on the data. In general, though, I think lower Fed rate hike expectations should be supportive of stocks, while increased tightening prospects could dent shares. If the jobs data is especially weak (e.g. <+150K), then I would expect shares to come under pressure on a weaker US outlook, even though rate hike expectations would also drop.
Check back here after the data release for analysis of the data and what it means for investors.