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NFP Preview: GM effect to mask slowdown?

Chris Weston
Head of Research
5 Dec 2019
The headline is likely to be strong owing to striking workers returning. Looking through this, will the current downtrend in employment growth continue?

Amongst all the headline havoc, political, geopolitical and central bank meetings that have taken place this week, we still have the monthly US jobs report (every first Friday of the month) to look forward to and traders will be as focused as ever on tomorrow’s release.

Consensus is calling for a rise of 185k for November. However, much of this increase is driven by the October strike at General Motors with close to 46,000 people going back to work. As such, the headline figure should overstate the actual trend.

Slowing jobs growth

Job creation in the US has been slowing since the second half of 2018, with the six-month average generating around 143k jobs per month. This is still ahead of the monthly pace necessary to keep the unemployment rate steady but has decelerated from the 200k over the last eight years.

Fewer hiring plans and overtime hours are indicating further weakening ahead in employment growth. These soft indicators have been confirmed in both the Markit PMI and ISM reports.

Missing labour market slack, still?

In contrast, unemployment is expected to remain unchanged at 3.6%, stabilising around 50-year lows. The absence of any slack will be enough to sustain growth in wages at 3% for the third consecutive month.

This may be the key number tomorrow. We are well beyond what the Fed considers full employment, so Powell & co are keen to see a tight labour market feeding into higher wages. There has not been much sign of that so far so any change will see the buck catch a bid.

Market Impact

A strong report should counter the weak data releases we’ve seen over the last few days and help the greenback. A hawkish FOMC meeting next week would also bolster dollar bulls. Conversely, a sharp slowdown will confirm the downtrend in jobs growth, so will it prompt the Fed to reconsider its ‘insurance’ policy easing?

The Fed believes the economy is in a good place and in wait-and-see mode currently, happy to see the effects of their three rate cuts. The market agrees with this as it’s now pricing in just one more, in late 2020.

USD/JPY sees the greatest increase in volatility on NPF days, whilst NZD/USD get the biggest boost. USD/JPY made six-month highs earlier this week but has sold off sharply and is now trading back in the range. There is a small downward bias which means the pair could push towards 108.05, but sideways trade is more likely. On the upside, only a break of the 109.20 resistance would indicate a change.

NZD/USD broke sharply to the upside on Monday and four straight days higher have now seen the pair come into a confluence zone of resistance around 0.6535. The 200d MA and a long-term trendline from August 2015 reside here, plus prices have hit the upper Keltner band. With a bearish pin bar potentially forming today, watch for the November high at 0.6466 to act as support.

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