US NFP Forecast: Nonfarm Payrolls expected to slow sharply in October after September upside surprise

03 Nov 2023, 14:04 · Views 32

US Nonfarm Payrolls are forecast to rise by 180K in October, nearly halving from September’s 336K increase.
Headline NFP and Average Hourly Earnings data are set to significantly impact the US Dollar.
The Bureau of Labor Statistics is due to publish the United States employment data at 12:30 GMT.

The Bureau of Labor Statistics (BLS) is due to release the highly-anticipated Nonfarm Payrolls (NFP) report from the United States (US) on Friday, which could have major ramifications for US Federal Reserve (Fed) policy outlook. The US Dollar (USD) is poised for a big reaction to the labor market data, as NFP data tends to infuse intense volatility across the FX board.

The Fed on Wednesday kept the policy rate steady in its current 5.25%-5.50% range, as widely expected. The US Dollar, however, succumbed to the sell-off in the US Treasury bond yields after Fed Chair Jerome Powell remained non-committal on the need for further tightening. Although Powell did not rule out another hike, markets perceived his words as not-so hawkish as they expected. Powell acknowledged tighter financial conditions while adding that taming inflation will most likely require a slowdown in growth and dampening in the labor market.

Earlier on Wednesday, Automatic Data Processing (ADP) said the US private sector payrolls rose 113K in October, compared with a 89K job addition in September while below the estimate of 150K. The Job Openings and Labor Turnover Summary (JOLTS) report showed that the number of job openings on the last business day of September stood at 9.553M, slightly up from a revised 9.497M in August and ahead of the 9.25M forecast.

The US employment data continued to portray persistent labor market tightness, which if confirmed by a strong October Nonfarm Payrolls data on Friday could bring back Fed rate hike bets on the table.

Markets are now pricing in only a 20% chance of a rate increase in December, down from 29% on Tuesday, with 25% odds of a raise in January, down from 39% on Tuesday, according to the CME Group’s FedWatch Tool. Markets seem to have priced in a 70% chance that the Fed is done hiking rates, and are even expecting rate cuts amounting to 85 basis points (bps) next year, starting as early as June.

What to expect in the next Nonfarm Payrolls report?

Friday’s Nonfarm Payrolls data is likely to show that the US economy added 180K jobs last month, almost halving from a job addition of 336K in September. The Unemployment Rate is expected to hold steady at 3.8% in the reported month.

Average Hourly Earnings, a measure of wage inflation, will be also closely scrutinized for its impact on the Fed interest rates outlook. Average Hourly Earnings are seen rising 4.0% over the year in October, slowing from a 4.2% increase in September. On a monthly basis, Average Hourly Earnings are seen a tad higher at 0.3% in October, as against a 0.2% increase in September.

Analysts at TD Securities noted, “Job gains likely lost meaningful speed in Oct, with payrolls mean-reverting post booming Sep report (it will also reflect an impact on mfg jobs due to the UAW strike). We look for the UE rate to stay unchanged at 3.8%, and for wage growth to print 0.2% MoM.”

When will US October Nonfarm Payrolls data be released and how could it affect EUR/USD?

The Nonfarm Payrolls, a widely watched indicator of the US labor market, will be published at 12:30 GMT. EUR/USD is struggling to extend the renewed uptick above 1.0600, despite the dovish Fed expectations. It remains to be seen if the US employment data will help the pair find acceptance above the latter.

An upbeat NFP headline print and hot wage inflation data could reignite expectations of a December Fed rate hike, offering much-needed support to the US Dollar while dragging EUR/USD back toward 1.0500. On the other hand, the US Dollar could resume its correction from multi-week highs, if the data comes in weak and fans expectations that the Fed’s tightening cycle is over. In such a case, EUR/USD could extend its recovery toward 1.0750.

Dhwani Mehta, Analyst at FXStreet, offers a brief technical outlook for trading EUR/USD on the NFP data release. “The main currency pair has moved away from near weekly highs of 1.0675, although remains hopeful as the 14-day Relative Strength Index (RSI) holds well above the midline. The immediate resistance is aligned at the weekly high of 1.0675, above which the 1.0700 level could be retested en-route the psychological 1.0750 barrier.”

“On the flip side, the 21-day Simple Moving Average (SMA) at 1.0582 could lend some support to buyers if the downswing kicks in. The next relevant cushion is seen at the two-week low of 1.0517,” Dhwani adds.

Economic Indicator

United States Nonfarm Payrolls

The Nonfarm Payrolls released by the US Bureau of Labor Statistics presents the number of new jobs created during the previous month in all non-agricultural businesses. The monthly changes in payrolls can be extremely volatile due to their high relation with economic policy decisions made by the Federal Reserve. The number is also subject to strong reviews in the upcoming months, and those reviews also tend to trigger volatility in the Forex board. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or bearish), although previous months' reviews and the unemployment rate are as relevant as the headline figure, and therefore market's reaction depends on how the market assets them all.

Why it matters to traders

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

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