Previewing May’s NFP

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The all-important release of US Non-Farm Payrolls data is coming up. There is some concern that the number will disappoint the market. There is a host of other data coming out at the same time, so we could see even more volatility this time around. Let’s review some of the latest events and what analysts are saying about what the NFP could do to the markets.

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Non-Farm Payrolls

The top line Non-Farm Payrolls is the number that usually moves the market since it’s one of the most important gauges of the US economy. It’s not just the number of jobs created excluding farm-related employment, but also government and non-profit jobs.

One of the commentaries that have been circulating in the market is the potential effect that the US census will have on the employment and jobs figure. While NFP does exclude formal government employment, the temporary jobs created by the Census in the past have temporarily inflated the NFP figure through ancillary jobs.

The Data and the Market

Along with the release of new data, we also get revisions to prior NFP releases. These revisions of prior data can impact the market further. This is especially true if the headline number is in line with expectations. Last month’s result of 263K handily beat expectations and was way above the norm. Often, outlying numbers are revised the following month. When done, it has the potential of lowering the previous month’s results.

Since there is so much data being released at the same time, a few minutes of volatility is expected while traders digest the mountain of data. It’s only after that the market settles into its new longer-term trend in reaction to the data.

What We Are Expecting

There is something of a consensus that a “normal” NFP is something between 180-200K; something significantly above that is likely to be interpreted as really good and push the market higher. A result broadly below that could be seen as a disappointment and lead to USD weakness. The consensus among surveyed economists this time around is for there to have been 185K jobs added during May, a significant drop from the prior month, but bringing the figure back into a normal range.

A potential wrinkle comes from Wednesday’s release of of the ADP Employment Survey, which showed just 27K additions, well below the 185K expected. Up until recently the ADP survey was seen as predictive of the NFP result. However, it’s lost its reputation of late.

The Explanation

Following the release of the ADP survey, several economists pointed to labor shortages impeding job growth. Large companies continued to hire, while small companies didn’t. Furthermore, growth was concentrated in the service sector. Construction and goods-producing sectors suffered job losses.

This situation can be seen in the expectations regarding the components. The unemployment rate is expected to remain stable at a record low of 3.6%. On the other hand, the participation rate only inches up to 62.9% from 62.8%.

Average hourly earnings are expected to pick up the pace of increase, rising 0.4% in the last month over the 0.2% prior. This would imply 3.4% in wage inflation, quite above the Fed’s target rate.

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