US Non farm payrolls in focus

Investors are sitting on the side lines ahead of the first non-farm payroll release of 2017. With December’s rate hike safely behind us the market will now turn its attention the Trump’s inauguration on January 20th and the pace of rate hikes across 2017. The non-farm jobs report will continue to influence the Fed’s decision and the pace of tightening, whilst any news on Trumps economic and fiscal policies will continue to drive the markets.

Jobs under Trump

Trump has clearly and repeatedly stated how important job retention and creation is for the US. However, it can’t be ignored that Trump will be taking office after an impressive bout of monthly employment increases, not only throughout 2016, but also throughout the Obama administration. Whilst the last few months of releases have still been strong, depicting a stable US labour market, the trend is also slowing. Last month’s reading of 178,000 jobs was by all means impressive, but it was short of the 229,000 jobs created the same month one year earlier and short of the 12-month average of 193,000. Trump is taking over as President at a time when the labour market is starting to show signs of full capacity and unemployment is at historically low levels.

The forecast

The expectation is for 175,000 jobs to have been created, unemployment is forecast to be 4.7%, average hourly earnings are expected to have increased by 0.3% after last month’s hugely disappointing decrease of -0.1%.

There have been a few indications that we could be in for a disappointment, for example the weaker than expected ADP private sector payroll release, which showed an additional 153,000 jobs were added in December, significantly short of the 175,000 forecast. A mixed bag from the ISM manufacturing and non-manufacturing PMI employment components hasn’t eased concerns either.

Broadly investors will be happy to walk away with any figure above 160,000 even if this skirts around the issue that the jobs being created appear to be in the low skill low wage bracket, rather than where the losses are stemming from – such as the highly skilled, highly paid shale industry.

The potential market reaction

A healthy and strong labour market will continue to be on the radar for the Federal Reserve, in addition to price stabilization, an area of policy making which has been brushed aside until Trump became President elect and inflation looks set to jump on Trumps spending plans. The Fed will want to see robust figures in order to continue to feel comfortable with the planned three rate rises for next year, although Trumponomics may well take centre stage following Trump’s inauguration.

Should we see a release above 180,000 this could  increase expectations of a faster pace of rate hikes across 2017, boosting the dollar and pulling gold lower. Anything below 160,000 would be expected to have the reverse impact.