The Employment Situation report (which contains Non-Farm Payrolls) is seen as the most important economic announcement that the market looks out for every month. The data dependency of the Federal Reserve and the obsession that the market appears to have with the exact timing of the first rate hike means that the Non-farm Payrolls report takes on an extra dimension in the coming months. Today we get the first of two payrolls reports in front of the September meeting of the Federal Open Market Committee. The market is now pretty much nailed on for a rate hike in at least one of the remaining FOMC meetings in 2016. These next two payrolls reports will be crucial in deciding whether the Fed goes in September or holds off until December. Below I have laid out some thoughts on a few issues that Non-farm Payrolls pose.
Look past the headline data. We know that the Fed sees the labor market as strong, so what is holding it back. Well the continued sluggish wage growth is one reason. Average hourly earnings have remained stubbornly around 2.0% or just above for well over two years now. Last month in the payrolls report the month-on-month growth for Average Hourly Earnings was 0.0%. There could be a problem with the reading this month too, as the recent Employment Cost Index (a quarterly data set) fell to quarter-on-quarter growth of just +0.2% which was the lowest for 33 years. This also meant that the year on year data was +2.1%. The ECI is a measure of labor cost of which around 70% is comprised of wages and salaries so it tends to run along with the wage growth data in the payrolls report.
There is also a problem in that in the payrolls report 12 months ago, average hourly earnings were +0.3% and if today’s expectation of +0.2% is achieved this will mean that the year on year data will fall back to 2.0%. If does not seem as though there will be any pick up in wage growth n today’s payrolls report. Added to the fact that the ECI suggests there is still a lack of upside pressure on earnings growth, the hawks could again be disappointed today.
Labor force participation is also an issue for the Fed. The participation rate just keeps on falling. Could this be one of the reasons why the unemployment rate is so low yet earnings growth is yet to pick up? The Fed believes that full employment is somewhere in the range of between 5.0% and 5.2% unemployment. The participation rate has been falling consistently since the height of the financial crisis in 2008 as people have dropped out of the labor force and not looked to return. A pick up in the participation rate (currently at 62.6% and fell from 62.9% in the previous report) would certainly be good news, even if it could mean an increase in the unemployment rate. However, there will need to be a bucking of the trend for this to be seen.
So what about the impact of payrolls on the market? Well, volatility on Euro/Dollar tends to be elevated on payrolls day, but not by a huge amount. In the past 12 months the average number of pips in the high low daily range on EUR/USD has been 117. Across the last 12 Non-farm Payrolls days, the average number of pips in the daily range is 133. This is clearly an increase on the average in the past 12 months. The lowest daily range was back in summer last year, when there were just 67 pips this time last year and then 66 pips in the report on 5th September. The highest pip range came back in June with 231 pips (when there was a big beat of expectations on the headline number and an unexpected rise in average hourly earnings). For the record, as I write this, today’s daily range is currently 44 pips.