NFP: Should we be happy with the num­bers?

Financial Mirror (Cyprus) - - FRONT PAGE -

On Fri­day, De­cem­ber 4, US non-farm pay­roll data was re­leased – the last time this will hap­pen in 2015. The con­sen­sus es­ti­mate fig­ure for Novem­ber was 200,000 new jobs; how­ever the ac­tual fig­ure came in over 5% above expectations at 211,000 new jobs cre­ated. This fol­lows an ex­cep­tional month of non-farm pay­roll data in Oc­to­ber 2015 where 271,000 new jobs were re­ported af­ter con­sen­sus es­ti­mates placed the fig­ure at 180,000. How­ever such was the strength of the US econ­omy in Oc­to­ber that the ac­tual jobs fig­ure was re­vised up­wards to 298,000 new jobs cre­ated. The data is typ­i­cally re­leased on the first Fri­day of the month, and it is one of the most highly an­tic­i­pated eco­nomic met­rics.

The fig­ure it­self can be in­ter­preted in sev­eral ways: pos­i­tive and neg­a­tive. Viewed from a pos­i­tive per­spec­tive, the NFP fig­ure came in 11,000 jobs over expectations and sen­ti­ment is there­fore bullish. How­ever, it is sub­stan­tially lower than the NFP data for Oc­to­ber which was re­vised up­wards to 298,000 new jobs for the month. The big­gest driv­ers of job growth were health­care, con­struc­tion, pro­fes­sional and tech­ni­cal-re­lated ser­vices. As ex­pected, in­for­ma­tion and min­ing em­ploy­ment suf­fered in Novem­ber.

The US non-farm pay­rolls chart has en­dured more suc­ces­sive monthly de­clines (month on month) than in­creases. Be­tween May and Septem­ber, each suc­ces­sive month of­fered up a smaller in­crease in em­ploy­ment over the pre­vi­ous month, al­though there have been no neg­a­tive growth rates in the US all year long.

If we break down the num­bers, we can see that health­care in­creased by 24,000 jobs in Novem­ber, em­ploy­ment in drink­ing places and food ser­vices in­creased by 32,000 in the month, con­struc­tion in­creased by 46,000, and re­tail trade in­creased by 31,000. There were, how­ever, two neg­a­tive growth rates in in­for­ma­tion which shed 12,000 jobs and min­ing which gave up 11,000 jobs. The em­ploy­ment re­port is es­pe­cially im­por­tant at this crit­i­cal junc­ture. The Fed­eral Re­serve is meet­ing on De­cem­ber 15/16 for the last non-farm pay­rolls jobs re­port of the year. The De­cem­ber re­port will be dis­cussed on the first Fri­day of Jan­uary 2016. The next sig­nif­i­cant an­nounce­ment will be US re­tail sales month on month for Novem­ber on De­cem­ber 11, just four days be­fore the de­ci­sion about the in­ter­est rates. The Fed con­tin­ues to tar­get strong do­mes­tic growth data in the form of re­tail sales, non-farm pay­rolls, healthy un­em­ploy­ment rates, ris­ing pur­chases and ris­ing wages. The US em­ploy­ment re­port im­me­di­ately cast a shadow on the size and scope of the US re­cov­ery, with the Fed de­ci­sion slightly less likely than be­fore.

How­ever, the fig­ure is still suf­fi­ciently strong to war­rant a short-term in­ter­est-rate hike in De­cem­ber. This would be the first time in al­most nine years that the Fed has ini­ti­ated an in­ter­est-rate hike.

In other pos­i­tive news, the un­em­ploy­ment rate is hold­ing firm at the Oc­to­ber level of 5%. This cer­tainly bodes well for the up­com­ing Fed de­ci­sion next week. That the un­em­ploy­ment rate is at a 7.5 year low is laud­able. The Fed has been tar­get­ing an un­em­ploy­ment rate of 4.9%, and that fig­ure is con­sid­ered the full em­ploy­ment level. The NFP data is the clear­est pos­si­ble indi­ca­tor that the most im­por­tant com­po­nents of the US econ­omy are func­tion­ing as they should. All of this points to an in­escapable re­al­ity: a De­cem­ber rate hike is more likely than ever.

On Wed­nes­day, De­cem­ber 2, Janet Yellen ad­dressed leg­is­la­tors and she made it clear that the US econ­omy was on track to achiev­ing its over­all ob­jec­tives. As a re­sult, the path has been cleared for a De­cem­ber liftoff. Ac­cord­ing to Yellen, the US econ­omy will need to cre­ate a lit­tle less than 100,000 jobs ev­ery month to main­tain pace with the growth in the pop­u­la­tion. There­fore, the Novem­ber fig­ure of 211,000 new jobs more than sat­is­fied expectations.

The vast ma­jor­ity of pri­mary dealer banks deal­ing with the Fed­eral Re­serve Bank are ex­pect­ing a rate hike next week. The con­sen­sus among cen­tral bankers is clear: a slow and steady rate hike is pre­ferred to a sharp and sud­den uptick in the in­ter­est-rate. This is likely to con­tinue through­out 2016, but the Fed will be care­ful not to in­crease in­ter­est rates too much be­cause the big­gest debtor – the US gov­ern­ment – would not be able to re­pay ex­ces­sive in­ter­est on al­most $20 trln of na­tional debt.

Across the At­lantic, the Euro­pean Cen­tral Bank moved in the op­po­site di­rec­tion. Mario Draghi of the ECB de­cided to make good on his prom­ises to prop up the Euro and stim­u­late the Eu­ro­zone by re­duc­ing the de­posit rate by 10 ba­sis points to -0.3% and by a con­tin­u­ance of the as­set re­pur­chases pro­gramme for an ad­di­tional six months to March 2017 at a rate of EUR 60 bln per month. Strangely, the ac­tions taken by the ECB strength­ened the Euro. The Euro­pean cur­rency hit a 1-month high against the green­back af­ter the an­nounce­ments were made. Cur­rency traders, mar­ket par­tic­i­pants and spec­u­la­tors were ex­pect­ing an in­crease in the as­set re­pur­chases pro­gramme in the re­gion of EUR 75 bln per month. The fact that less was done to stim­u­late the Euro helped to strengthen it in the cur­rency mar­kets. How­ever stocks turned south since the prospect of a strong euro is a neg­a­tive har­bin­ger for ex­port-driven growth. By the end of the trad­ing week on Fri­day, De­cem­ber 4, the USD strength­ened against the euro af­ter it was re­ported that OPEC could not come to con­sen­sus re­gard­ing a pro­duc­tion ceil­ing on oil out­put. In other words, OPEC will con­tinue to pursue mar­ket share above price con­sid­er­a­tions.

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