Time does fly ‘when you’re having fun’, as we await yet another US Non-Farm Payrolls (NFP) release, and yes it really is the start of June. Market calls today are for a increase of 182k jobs with a stable 4.4% unemployment rate and just 0.2% gain in average earnings which equates to 2.6% y-o-y. However, May data has a history of being well away from the calls due to unexplainable calendar influences.
On Tuesday evening Federal Reserve governor Lael Brainard, a well-established dove, who of late has been rather more centralist than dovish, added her thoughts on the current situation the FOMC finds themselves in. On the funds rate she said that 'it will likely be appropriate soon' to adjust the Funds rate. She did add that if soft inflation data persists that it 'would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.' So still data dependent but the concerns for the inflation outlook have helped US Treasury yields lower.
As widely anticipated, with just 6 days before the US Presidential Elections and without a scheduled press conference, the FOMC held off raising rates at least until the next meeting on December 13-14. This now means that it will have been a whole year since the last Fed rate hike last December back when markets were pricing in 4 rate rises in 2016. Now there is only a 78% expectation that there will be just one hike, although this is up from the 70% expectation of Fed action prior to the release as ‘the case for an increase in the federal funds rate has continued to strengthen’.
The summer markets are still with us as focus moves on to Friday's US non-farm payroll (NFP) release; now that Janet Yellen’s Jackson Hole testimony is behind us. Following her comments at the back-end of last week, the market is divided on the timing of the next Fed rate hike. The probability of a hike at the next meeting on September 21st has risen from almost zero following the Brexit vote to 36% today, down from 42% on Friday afternoon following, what some might call, more hawkish comments from the Fed chair. In the run up to Friday’s NFP data a further 5 Fed members are speaking which could add some volatility in the summer time’s less liquid market.
The employment data continues to be one of the stronger data points on the US economy. Today’s non-farm payroll figure showed the US economy added 292,000 new jobs in December which was well ahead of market expectations of +200,000 jobs. The two month net revision of +50,000 jobs was also strong.
Following on from the excitement over the ECB yesterday and disappointment from the limited rate cut, of 10 basis points, combined with the extension of QE for a further six months, the market was primed for today’s Non-Farm Payrolls (NFP) for November. The general feeling here is that the limited action by the ECB should assist the Fed with a rate rise at their December 16th meeting.
On Wednesday Janet Yellen noted in her testimony before the House Financial Services Committee “at this point, I see the US economy as performing well” and that a rate increase in December remained a “live possibility” but remained data dependent. Inflation, despite running “considerably” below the FOMC’s 2% objective, is viewed as reflecting “declines in energy prices and the prices of non-energy imports” and “If we were to move, say in December, it would be based on an expectation, which I believe is justified, that -- with an improving labor market and transitory factors fading -- that inflation will move up to 2 percent.”
So here we are again, Non-Farm Payrolls day, that all important economic release regarding the trajectory of the US economy. A few decades ago it was the US current account and trade balance which was the “big release” but since NFP has been the dominant series. Maybe this is because it is the first indicator of activity for the previous month or indeed that the week following NFP there is almost a vacuum of top tier releases putting NFP as the dominant series to set the tone for the coming weeks.
The August US non-farm payroll data, which is historically quite volatile and very often revised was released with the headline below expectations with 173,000 jobs created against calls of 217,000. However, the revisions to the two previous months was a net increase of 44,000 and so a quite neutral overall outcome. The unemployment rate fell to 5.1% against expectations of 5.2% with the labour force participation rate dropping 0.1% to 62.6% which will be taken as explaining the unemployment rate drop.The most important indicator in the report was a rise in average hourly earnings to 2.2% from 2.1% last time and average weekly hours also increased to 34.6 from 34.5.