If there is one common theme across sellside previews of tomorrow’s nonfarm payrolls number, expected at 180K after a surprising jump to 209K in July, it is to brace for disappointment, or in Wall Street parlance, “downside risks.” And it’s not because of Harvey which hit the US far too late in the month to be reflected in the monthly payrolls.
The simplest reason for tomorrow’s miss is shown in the following Morgan Stanley chart, which predicted the July 209K print with dead-on precision, and which extrapolates the recent Y/Y slowdown in job growth to only 136K jobs in August (which, in the current “bad news is good news” environment, should be sufficient to send stocks to new all time highs as it will mean an even greater delay by the Fed).
In addition to the base effect, there are several other notable reasons why tomorrow’s job report will likely be a dud, among which i) the recent slowdown in both the manufacturing ISM and today’s Chicago PMI prints; ii) construction job growth is expected to hit a brick wall, while mining and energy job creation has once again slowed down as shale appears to have peaked; iii) last month’s unexpectedly strong print was largy due to a one-time surge in leisure and hospitality jobs which is not expected to persist…
… and finally August payrolls have historically been the softest of any other month in the year.
The good news is that even if the payrolls number is a major disappointment, Wall Street – and the Fed – will be far more interested in the average hourly earning number, although here too the risk is for disappointment, as today’s Personal Income and Spending report showed, specifically the ongoing slowdown in both private and and government worker wages, both now below last month’s 2.5% Y/Y increase in AHE according to the BLS.
But the best news, for stocks at least, is that while a good payrolls and wages number will send stocks higher, while Treasurys selloff, on “confirmation” of the Fed’s tightening bias, a miss for both categories will supercharge risk gains, and everything – bonds, stocks, gold and of course bitcoin – will be bought aggressively, as another slowdown in the economy will be interpreted as a Fed which is again indefinitely on the sidelines.
With that said, here is a complete preview of what to expet as well as a full rundown of sellside expectations, courtesy of RanSquawk
US NON-FARM PAYROLLS (AUGUST 2017) PREVIEW
- The Bureau of Labor Statistics will release August nonfarm payrolls data at 1330BST (0830EDT) on 1 September 2017
- The consensus expects headline payroll growth of 180k in August, in line with the 12-month average.
- Given that U.S. growth has firmed and headline payrolls has been solid, inflation (specifically wage growth) has been the missing key for the Fed; accordingly most attention will likely fall on the average hourly earnings data which is seen rising slightly
- Note: The impact from Hurricane Harvey will not be reflected in the August payroll data.
- Non-farm Payrolls: 180k (144k – 211k, Prev. 209k)
- Unemployment Rate: 4.3% (4.2% – 4.5%, Prev. 4.3%)
- Average Earnings Y/Y: 2.6% (2.5% – 2.7%, Prev. 2.5%)
- Average Earnings M/M: 0.2% (0.1% – 0.3%, Prev. 0.3%)
- Average Workweek Hours: 34.5hrs (34.4 – 34.5hrs, Prev. 34.5hrs)
- Private Payrolls: 179k (140k – 200k, Prev. 205k)
- Manufacturing Payrolls: 9k (3k – 5k, Prev. 16k)
- Government Payrolls: No forecasts (Prev. 4k)
- U6 Unemployment Rate: No forecasts (Prev. 8.6%)
- Labour Force Participation: No forecasts (Prev. 62.9%)
BANK AUGUST PAYROLL ESTIMATES:
- Commerzbank: 160K
- Goldman: 160K
- Citi: 170K
- RBC: 175K
- HSBC: 180K
- Wells: 186K
- UBS: 190K
- Barclays: 200K
- Cap Econ: 200K
Trend: Headline non-farm payrolls have averaged 184k in the first seven months of 2017, a touch lower than 187k average in 2017. But the trend rate of payroll growth has ticked up in recent months; on a three-month rolling average basis, payroll growth averaged 195k in July, the strongest rate since February (201k on a rolling three-month average), and above the 180k 12-month rolling average.
Seasonal patterns: Historically, August’s official payrolls data has tended to be weak due to measurement issues, but is often revised higher in subsequent months.
Wages: Data has painted a picture of a healthy labour market, as of late, with the rate of job growth plodding along nicely. In its July statement, the FOMC noted that the labour market has “continued to strengthen” and “conditions will strengthen somewhat further” in the months ahead. But with that said, the FOMC has stated that “market-based measures of inflation compensation remain low”.
Given that the headline payroll growth has been solid, the latest round of US GDP data (for Q2) surprised to the upside, and personal consumption, real personal consumption and personal income data also surprised to the upside (July data), PCE inflation (fell to 1.4% Y/Y in July, hitting the lowest since late 2015) and general wage growth has been the missing piece of the puzzle for the Fed. Accordingly, attention will firmly be on the wages components.
Some, therefore, have argued that this month’s data may be less important for the monetary outlook given the better tone of data leave some room for a headline miss, as well as seasonal issues affecting the August data.
In August, the rate of average hourly earnings growth is expected to come in line with the lacklustre pace that we have been accustomed to, as of late. Analysts at Goldman Sachs have also noted that calendar effects may play a role this month, and forecasts a below-consensus 0.1% M/M, explaining that “early payroll survey weeks are historically associated with weaker average hourly earnings growth. These effects may have to do with the intra-month timing of wage payments, which US Treasury Statement data suggest are elevated around the 1st and 15th of each month.”
The bank adds that “pay periods that are relatively early may miss some of the later payments. In months when the Saturday of the reference week falls on the 12th of the month—as is the case in August 2017—average hourly earnings growth tends to be particularly weak.” It is worth noting that August 2017 also had three additional workdays relative to July, which Goldman
LABOUR MARKET INDICATORS
ADP: ADP Reported the addition of 237k payrolls in August July’s data was revised up by 23k to 201k, with the headline coming in at the top-end of expectations. Moody’s chief economist, who helps compile the data, noted that the US labour market continues to power ahead, and job creation was strong across nearly all industries and company sizes, adding “mounting labour shortages are set to get much worse” in the months ahead. However, as always, analysts cautioned about reading too much into the data: ING suggested taking this data with a pinch of salt, pointing out that the model heavily relies on lagged values of the official jobs data, and to a certain degree, other economic indicators, and “this mean’s ADP’s estimate isn’t always that accurate when it comes to predicting the closely-watched payrolls number.”
CHALLENGER JOB CUTS: US employers signalled their intentions to cut 33,825 jobs from their payrolls in August, according to Challenger Grey and Christmas, representing a 19.4% rise M/M, and a 5% rise Y/Y. Analysts pointed out that this was the first M/M rise in intended job cuts since March, although some quickly noted that the rate in the first eight months of the year is around 26% lower when compared to the same period in 2017. “Although job cuts have risen this month, they continue to be significantly lower compared to the same time last year,” Challenger commented.
WEEKLY CLAIMS: The most recent initial jobless claims data shows claims at 236.75k on a four-week moving average basis, slightly lower than the 242k rate heading into July’s payrolls data. In their analysis, analysts were far more focussed on the weeks ahead, and many argued that claims will rise significantly over the coming weeks due to the impact of Hurricane Harvey. There is uncertainty about the degree to which they will rise, but analysts at Pantheon Macroeconomics note that claims jumped by 96k after Katrina.
WHAT BANK DESKS ARE SAYING:
BARCLAYS: We forecast nonfarm payrolls to rise by 200k in the August employment report and for private sector payrolls to rise by 190k. The labor force participation rate has moved higher by two-tenths in recent months to 62.9% and has yet to move above 63.0% since March 2014. As a result, we look for solid employment and lack of further near-term upward momentum in participation to lead to a one-tenth decline in the unemployment rate to 4.2%. Elsewhere in the report, we expect average hourly earnings to rise by 0.3% m/m (2.7% y/y) and for average weekly hours to remain at 34.5.
CAPITAL ECONOMICS: We estimate that non-farm payrolls posted another healthy gain of 200,000 in August. The latest data suggest that the recent strength of employment growth has continued in August. The employment index of the Markit manufacturing PMI is still relatively subdued, but the services index remains close to an 18-month high. Furthermore, initial jobless claims continue to trend lower. At 4.3% in July, the unemployment rate is already below Fed officials’ estimate of its natural level. Based on the surge in firms reporting difficulties filling job vacancies, we suspect the unemployment rate fell to just 4.2% in August, with further declines looking likely over the coming months. Finally, another 0.3% m/m increase in average hourly earnings would lift the annual growth rate back up to a six-month high of 2.7%.
CITI: Given continued soft inflation readings, average hourly earnings (AHE) remains the focus of the payrolls report as markets look for evidence that wage pressures are building. We expect on-consensus AHE growth of 0.2% MoM and a pickup from 2.5% to 2.6% YoY. We see risks around these prints as tilted to the downside however. A downward miss to consensus AHE would marginally reduce market pricing of a Fed hike in December. But the August CPI print, released a week ahead of the September FOMC meeting, will matter much more. Strong readings on economic activity and solid GDP tracking make payrolls growth less of a focus. After solid gains of 231k in June and 209k in July, we expect job growth to slow to below-consensus 170k. Still, a slight miss on headline payrolls is unlikely to significantly affect the market outlook given strong recent prints. Also some may dismiss a lower reading as being due to residual seasonality in August (we have had a string of low initial August readings). We expect an unchanged unemployment rate at 4.3%, with the market likely more sensitive to a downside miss.
COMMERZBANK: The US employment report for August should disappoint at first glance with payroll gains of only 160k. After all, the pace of monthly job creation has averaged 185k this year to date, which should more or less reflect the trend. However, in the past years the August report often disappointed initially, before August payroll gains were then mostly revised upwards. The reason could be that because of vacations an unusually high number of companies report their employment data too late to be included in the first release. Even a monthly gain of 160k would be sufficient to drive the unemployment rate slowly further down on trend, because at present only some 100k persons additionally enter the labour market each month. In August, however, the unemployment rate probably stood at 4.3% as in the month before (consensus: 4.3%); after all, at 4.3497% in July it came in just below the rounding limit. As for average hourly wages, which are strongly impacted by calendar effects, only a growth rate of 0.1% on July seems to be on the cards this time (consensus: 0.2%).
GOLDMAN SACHS: We estimate nonfarm payrolls increased by 160k in August, below consensus of +180k and the 3-month average pace of +195k. Our forecast reflects somewhat more mixed labor market fundamentals and a drag from residual seasonality, as first-reported August payroll growth has been consistently weak in recent years. We expect household job growth will be sufficient to leave the unemployment rate unchanged at 4.3%, but due to particularly unfavorable calendar effects, we estimate a 0.1% monthly rise in average hourly earnings (+2.5% year-over-year). While we believe payrolls and average hourly earnings are both likely to miss consensus estimates, we think the employment report may be somewhat less important than usual for the monetary policy outlook, because 1) recent data have been firm so we have some room for a miss, 2) the August seasonal issue is now well known so even a somewhat larger miss may not significantly alter the staff view, and 3) there are several months between now and December to make up for any weakness in tomorrow’s report.
HSBC: So far this year, monthly increases in nonfarm payrolls have averaged 184,000. The underlying pace of growth is probably close to this average. However, nonfarm payrolls have often surprised to the downside in August. The outcome has fallen short of consensus expectations for the past six years in a row. We look for a 180,000 increase in nonfarm payrolls. We expect that average hourly earnings rose 0.1% m-o-m, leaving the y-o-y rate of increase unchanged at 2.5%. We forecast the unemployment rate was steady at 4.3%.
RBC: On net we expect the payroll report will continue to show very respectable job gains – we look for headline and private jobs to come in at 175k and 160k, respectively. Importantly as it relates to the Fed, these numbers are well above the Fed’s expectations of breakeven – a point that seems to be lost on the market when we get even a modestly below Street consensus outcome (which as of this writing is where our numbers stand). We expect the unemployment rate will hold at the cycle low of 4.3%.
UBS: Payrolls & private payrolls +190k, unemployment down, soft avg hrly earnings We project continued strength in payrolls in August, a consequent decline in the unemployment rate, no change in the weak path of average hourly earnings, and a flat workweek. Nonfarm payrolls probably rose 190k in August, slowing from 209k in July and 231k in June but still somewhat above their 180k 12-month average. We also forecast private payrolls up 190k. Risks from manufacturing and from spending at restaurants Risks to the payrolls estimate chiefly come from manufacturing and from hospitality employment. In non-auto manufacturing, employment had surged in July—and while we expect a pickup in output, the gain may have been overdone. In auto manufacturing, payrolls were little changed in July despite sharp output cuts. Hospitality payrolls have also been surging—reflecting restaurant hiring—and while some acceleration is corroborated by our equity-analyst colleagues, the July rise (+53k versus a 30k per month year-to-date average) may similarly have been exaggerated. All in all, though, our forecasts would be consistent with considerable momentum. Hurricane Harvey won’t affect the August figures (the payrolls survey ended too early). And we doubt that they will have much impact on September
WELLS FARGO: After a slowdown this spring, monthly hiring broke back above 200,000 jobs in June and July. We expect another solid payroll print for August. Initial jobless claims declined in recent weeks, consistent with fewer layoffs. Meanwhile, the most recent readings on job openings and difficulty filling open positions sit at cycle highs. However, the BLS has historically underestimated the initial August print more than any other month. Therefore, we suspect the payroll figures will show a more modest gain in August of 186,000 jobs. The unemployment rate likely stayed at 4.3 percent following two months of above-trend gains in the household measure of employment.
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