US: Expect a solid 185k gain in nonfarm payrolls - TDS

Research Team at TDS suggests that the US December jobs report is expected to reveal sustained job gains and a pickup in wage growth, alongside a likely rebound in the unemployment rate following its outsized drop in November.

Key Quotes

“We expect a solid 185k gain in nonfarm payrolls, line with the recent upturn in ISM employment indices and favorable seasonals. In particular, the ISM non-manufacturing employment index (having averaged 56.0 in November/December) is consistent with payroll growth in the vicinity of 200k. While this is supportive of a meaningful rebound in private services (which came in on the soft side in November), protracted weakness in manufacturing employment may offset as the sector continues to struggle in a weak global growth, strong dollar environment.”

“Given Chair Yellen's recent hawkish shift in tone highlighting the "diminished" levels of labor market slack, we place greater emphasis on measures of unemployment (both headline and U6 rates) and wage growth readings, which are likely to have greater influence over market reactions going forward. Assuming continued abovetrend payroll growth north of roughly 100k, measures of unemployment will be closely watched in December given their marked improvement recorded in November.”

“The headline unemployment rate, which fell to a cycle low of 4.6% in November, is expected to show a partial bounce back in December to 4.7% with upside risk, depending on the extent of the rebound in unemployed workers. (The latter nose-dived in November, driving the fall in the unemployment rate.) As revealed in the December FOMC minutes, participants generally believe the labor market is in the neighborhood of full employment and are attentive to the risks of undershooting the natural unemployment rate. Thus, the December print will be viewed against the Fed's median estimate of the natural rate, 4.8%, and sustained levels at or below 4.8% will reinforce the Fed’s more hawkish stance.”

“Finally, average hourly earnings will draw attention for an additional read on labor market tightness. Helped by calendar week distortions, we see upside potential for a strong monthly increase and expect at least a 0.3% m/m print in December. That would leave earnings growth back near its cycle peak of 2.8% y/y. Barring a sharp rebound in the unemployment rate (say above 4.8%), this should give a hawkish tone to the release.”

“Foreign Exchange

The Fed minutes probably added a bit more significance to this week’s NFP report than many had anticipated. Indeed, the minutes showed that nearly half the participants incorporated an assumption about fiscal stimulus in their forecasts. The flipside was that the minutes showed there was considerable uncertainty about the impact fiscal policy would have on the economy. This uncertainty about the outlook and the Fed’s reaction function has increased the importance of the December employment report. A strong reading will likely shape the markets view that the US economy is steadily closing the output gap, which should lead to faster normalization of Fed policy and a resumption of the USD uptrend. We suspect the market will pay close watch to the headline payroll print, the unemployment rate and wage growth. The minimum threshold for a good number is probably around 165k with anything below there likely to intensify downward pressure on the USD. Moreover, markets will closely watch the unemployment rate and AHE. An uptick in the UR or softer wage growth could dampen a solid headline number, probably leading to further drawdowns in an already overvalued USD.”