NFP Preview: Decent jobs growth expected

Consensus forecasts are for a rise of 164k for December, which comes on the back of a remarkably strong November report (266k). Last month also revealed 41k upward revisions to the prior two months. The return of the formerly striking GM employees lifted November’s headline figure by roughly 46k, but this was still way ahead of the expected 180k. As such, the market view that the Fed won’t move a dime in easing policy further, after the three rate cuts last year, has been firmly cemented.

Jobs growth still solid

Job creation in the US has been slowing since the second half of 2018, with the 2019 average set to generate around 175k jobs per month if the December consensus forecast comes in. This is still ahead of the monthly pace necessary to keep the unemployment rate steady but has decelerated from the 223k in 2018 and would represent the slowest average growth since 2011.

Employment gauges in the recently released ISM manufacturing and services surveys do give us an early steer on the likely pace of payrolls growth in the overall economy. Both subindexes dipped slightly, but the services measure of 55.2 has held onto most of the gains since its recent lows made last September at 50.5.

The widely watched ADP Non-Farm Employment report released yesterday came in strongly, smashing expectations although the correlation with the NFP number has recently been less than stellar.

More labour market slack than suggested by the unemployment rate?

Average hourly earnings, expected to remain at 3% year-on-year, ticked lower over 2019 which has baffled some, due to the unemployment rate being stuck at 50-year lows. Improved benefits packages may be responsible for holding down wages, whilst more disenfranchised people returning to work could also be a factor in this conundrum.

As we have said before, the economy is well beyond what the Fed considers full employment, so Chair Powell will be on the lookout for any signs of a tight labour market feeding into higher wages. If so, watch the dollar bulls seize the moment.

Market Impact

Another decent report, in line with the solid readings from the employment components of the ISM surveys, should help the greenback as its bounces back this year from recent losses. This kind of report may calm fears of weakness in the manufacturing sector spilling into the services sector, which is a key driver over the medium-term for the outlook of the economy.

The Fed is currently in wait-and-see mode and happy to see the effects of their three rate cuts from 2019. They believe that the economy is in a good place so the markets will need to see a handful of weak labour reports to see any change in this view. A sub-100k print plus weak wage growth would get the bears excited, pushing DXY back to the December lows around 96.35.