There are two main issues for the markets when it comes to tomorrow’s NFP data.
Firstly there is the effect of the end of enhanced unemployment benefits. And secondly, how the NFP results will affect the Fed’s outlook. This in turn impacts expectations about whether or not we will see a taper announcement in September.
Getting a handle on the projections
To understand the first issue, we have to explain why there was such a large beat in the numbers last time.
As anticipated, the “summer effect” played a role in this. In fact, many analysts expected jobs numbers to rise in June as nearly half of the US states had ended their increased unemployment programs by the end of that month.
But, there was a delay between the employment programs’ end, and people’s return to work. Or, at least this is one of the most common explanations as to why July saw such a large expansion in employment.
If that’s the case, then we’d expect to see lower numbers in August and another jump in employment in September. The remaining half of the US states (including the most populous ones) rolled off their extended unemployment benefits last month.
And the Fed’s reaction?
The Fed has repeatedly stated that employment is the key to determine when they will start the taper. The current consensus is that the Fed will announce at their next meeting later this month that they will start tapering in November.
A disappointing jobs number (estimated below around 600K) might cause the market to postpone their expectations for an announcement. That could weaken the dollar, and somewhat ironically support the stock market.
A result in line with the last three months, including a beat of expectations, would likely be a confirmation that we’ll see a taper announcement. There really isn’t any way for the taper to happen any sooner.
So even if there is an absolute blow-out in hiring numbers (say, well over a million), then it shouldn’t change the market outlook all that much.
What to look out for
Economists expect US Non-Farm Payrolls for August to show a net addition of 750K compared to 943K in the prior reading. As usual, there is a wide range of expectations, from as low as just over 500K to a little over 1 million.
The latest trend is for a higher revision of prior measures, which could add to optimism following the results. On the other hand, it could temper some of the optimism if there is an unexpected significant revision downwards.
For reference, the private ADP measure of job creation came in at half of the analysts’ projections. Specifically, the measure recorded 374K jobs added compared to the expected 638K. This is a repetition of the situation from last month, where ADP significantly underperformed ahead of NFP.
Economists also anticipate the unemployment rate to tick down to 5.2% from 5.4% prior. That implies a relatively stable labor force participation rate. Furthermore, it suggests that the bulk of jobs represents people returning to work.