NFP in focus days before the US Election

Following the Federal Reserve’s policy decision on Wednesday and the slightly more hawkish tone set by Chair Janet Yellen, the market would be forgiven for thinking that an interest rate rise in December was almost a dead cert. However, there are still two big near term hurdles to overcome.

The first being today’s non-farm payrolls and the second being Tuesday’s US Presidential elections – both of which have the potential to change the course of the Federal Reserve’s policy decision.

NFP expectations

The expectation is that around 175,000 new jobs will have been added to the economy in October (versus 156,000 for September), whilst the unemployment rate is forecast to drop from 5% to 4.9%. Average hourly earnings are expected to have risen by 0.3% month on month in October, up from 0.2% in September.

Despite weaker than expected ADP figures during the week, improvements in activity survey’s especially the manufacturing index point towards a strong figure being more likely.

We expect any headline figure above 150,000 to be interpreted as a positive reading, confirming on-going strength in the labour market, a key metric for the Federal Reserve, and therefore reinforce the potential for a December rate hike. In this scenario, we would expect to see a rally in both the USD and the S&P. However, given that the market is already pricing in an around a 70% probability of an interest rate hike prior to the end of the year, any rally is expected to be moderate.

If we get a significantly lower release, then the rate hike expectation could be threatened and this will put significant selling pressure on the dollar and the S&P alike.

A complicated month

But this is no ordinary non-farm payroll month, we have the added complication of the US Elections early next week, where Trump is quickly gaining back lost ground. Despite Clinton sitting with a comfortable for the final stages of the race, a dramatic change of fortunes has left Trump within touching distance of the prize. Given the potential market turmoil in the case of a Trump triumph, the Fed may look to delay the expected rate hike in December regardless of what today’s figures bring.

Additionally, market fears over Trump clinching victory next week could dampen even the strongest of NFP releases. So, even if NFP figures beat or even smash expectations the overriding concern of Trump closing the gap on Clinton, which has plagued the markets all week, could prevent any rally from really taking off.

In the same way, a disappointing reading could result in a severe sell off, as investors struggle to cope with the declining probability of a Fed rate hike this year, in addition to the increasingly uncertain election outcome, both of which combined could provide a storm in a tea cup for the markets.

Could this figure influence the way in which the electorate will vote?

It would seem like an outside chance but there is a small possibility that the NFP release could impact how voters vote.

A drop in the unemployment rate could play into Clinton’s hands, who is often considered a continuation of the current administration. Given that Clinton is the markets preferred, choice a fall in unemployment could give the Clinton campaign a boost and an uplift to a rather anaemic market.