February NFP Preview

The big macroeconomic event for the week is coming up with the release of February US Non-Farm Payrolls (NFP) at 08:30 EST (or 14:30 CET).

The release comes with a host of other data besides employment figures and has a habit of producing a lot of volatility in the markets. Here are some things to keep in mind ahead of this important event.

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Non-Farm Payrolls

As the name suggests, this is the headline number that gets the most attention. It’s the total number of jobs created in the US economy in February, excluding not just farming jobs (left out due to the seasonal nature of farming), but also government and non-profit jobs. One can consider the NFP as the preeminent measure of how the economy is doing.

When analyzing this data and its potential impact on the market, there are two factors to bear in mind. The first is the effect of employment. If employers are hiring more people, it means they expect to continue needing to keep making more products. That is a sign of a strong economy with a healthy outlook among businesses. And, this is largely supportive of the dollar.

The second factor is that as employment increases, you have more money in circulation. This should eventually lead to inflationary pressure, which is typically negative for the value of the dollar. But, if inflation increases a lot along with a growing economy, this means that the Fed is more likely to intervene. They do this to keep things from getting out of hand by raising rates, which is, in turn, strengthening for the dollar.

It’s not just the primary number that moves the markets, but at the same time we get revisions to the results from prior months, and they can also move the markets. This is especially true when the headline is in line with expectations.

Expectations

During last month’s release, the number came in at 304K, almost doubling expectations of just 165K. However, the prior month underwent a revision of nearly 90K, significantly reducing the positive effect. A number over 300K is typically seen as unusually good. These big outlying results will usually get revised lower a month later, which might be the case this time around.

A consensus has formed that a “normal” NFP number is one that comes in between 180-200K. A result significantly above that is usually “very good” and can pull the dollar up. We can consider anything below that number as more “negative,” and it will pull down the dollar accordingly.

For the upcoming February release, the consensus is for there to have been 185K jobs added during the month. This is a drop from that blowout 304K seen last month.

For a while, we could consider the ADP number as predictive of the NFP result, but it’s lost a bit of its reputation lately. In any case, on Wednesday, ADP said 183K jobs were added compared to the 189K expected. However, we should note that their prior month was revised higher to be in line with the NFP number.

Average Hourly Earnings

The other significant number coming out at the same time shows how much private non-farm workers earn. It’s a metric the Fed follows as a guide for future inflation and labor market tightness.

Expectations are for hourly wages have increased by 0.5% in the last month. This would be an increase in the pace over the 0.1% registered the prior month, and would bring annualized wage inflation to 3.3%. Note that this is well above the Fed’s inflation target.

Unemployment Rate

Usually, the actual rate isn’t as crucial to the markets as it is to politicians and the media. Nevertheless, it can still move the market, often depending on the underlying data components.

The consensus is for the unemployment rate to drop back to 3.8% from the 4.0% last month. This is mostly due to a reduction in labor force participation (since that was the driver in the increase in the unemployment rate last time).

The market can also react to underlying data seen in the components since they can help explain discrepancies in the headline numbers. They also give insight into certain sectors of the economy.

Construction, for example, continues to be in focus with the drop in mortgage rates. This showed an increase in hiring to 52K last month from the 38K of the prior two months. Both leisure and hospitality also increased, but that’s typical of December thanks to the holidays. The Trump administration’s preferred bit of news was that manufacturing jobs continued to grow last month, adding 13K.

The Market Moves

It usually takes the markets a few minutes to digest so much data, which is further exaggerated this time around with the concurrent release of housing data (which we talked about on Tuesday). After a few minutes of volatility, the market typically settles into its new pattern.