Most analysts, including us, are looking forward to the November nonfarm payrolls (NFP) release. The report will dive deep into the status of the U.S. labor market. In July, Federal Reserve Chairman Jerome Powell warned against the net job gains reported since April. He thinks these totals are exaggerated by as many as 60,000 jobs. Given this, the expected NFP outcomes have the potential to be highly impactful on future monetary policy direction and USD currency valuations.
The NFP report serves as an important barometer for how well the U.S. labor market is doing. Analysts expect it to paint a much sobering reality than many had previously hoped for. BBH FX analysts noted that the economy has likely lost around 20,000 jobs per month since April, contradicting earlier reports of a monthly gain of 40,000 jobs. This downward revision deepens concerns about the apparent strength of the labor market.
In September, virtually all of the increase in non-farm payrolls was due to the non-cyclical health care and social assistance sector. Still, the broader employment picture remains very unclear. The drop in the hiring rate points to a very weak labor demand overall in all sectors. Unsurprisingly, BBH’s FX analysts are on-board with this idea. So they warn that today’s NFP release is fraught with downside risks by virtue of this ongoing weakness.
“Indeed, the decline in the hiring rate suggests labor demand is weak and points to downside risk to today’s NFP release.” – BBH FX analysts
Analysts are looking for a consensus of 50,000 job increases for November, which already accounts for the survey for October. This estimate follows an annual revision in September of 119k job increases. Considering the current strikes and what’s propping them up, there’s little reason to believe we can meet even this low bar.
In addition to its effects on the headline employment number, weaker labor demand could have an impact on the Federal Reserve. BBH FX analysts write that the labor market has recently turned soft. This will only serve to solidify expectations for at least a 50 bps easing in Fed funds futures pricing out to next year. Therefore, a disappointing NFP print may have pronounced detrimental effects on the USD and broader market sentiment.
“Overall, weaker US labor demand will support Fed funds futures pricing 50bps of easing next year and undermine USD. In contrast, USD can recover some of its recent losses if there are signs that the slump in labor demand is stabilizing.” – BBH FX analysts
While broader market participants are looking ahead to Friday’s NFP release, they have been very keenly aware of what happens to USD exchange rates under various “NFP” scenarios. A worse than expected report would serve to heighten already present fears related to economic fragility and potentially push the Fed to tighten monetary policy even more.