Key points to note before you trade the December NFP:
– A positive surprise (even material one) is likely to cause a minimal response of the respective sign in the stock market or greenback: Fed officials have already signaled that the labor market has lost touch with inflation (“Phillips Curve is Dead”). Unless, of course, wages show an unexpected jump, which is unlikely, since the potential December surge in employment is seasonal, at the bottom of the spectrum of qualification, where wages are usually quite “reluctant” to rise.
– A negative surprise runs the risk of being interpreted as a labor shortage, as anecdotal evidences show this really happens when jobless rate is at a record low.
The following speaks in favor of strong NFP:
– Non-manufacturing PMI in December – as I wrote earlier, the broad reading beat expectations, but the growth of the employment component slightly weakened (from 55.5 in November to 55.2 in December). In general, the report indicates a stable situation in the labor market;
– The initial applications for unemployment benefits are self-explanatory:
– Payrolls estimate from the private agency ADP – 202K against 160K forecast;
– The expectations of signing the trade deal in January are a strong signal for firms to increase production/hiring. In this sense, probably the most informative will be change in Payrolls in manufacturing sector, which took probably the heaviest blow from tariffs. The Trump administration made a loud statement that the trade deficit with China will be reduced by $100 billion, it is interesting to see if corporate sector will react to this by increasing capex or hiring.
– Warm weather in December could provide a boost in employment in the construction sector.
– More vacancies from the government which is preparing for 2020 census.
Factors that could adversely affect job/wages growth:
– ISM data on the manufacturing sector – the broad indicator has been declining for 5 consecutive months and fell to its lowest level since 2009 in December.
– Concerns about calculation procedures of the Bureau of Labor Statistics. The number of new jobs for the 12 months ending in March 2019 was revised down by 500 thousand in August last year. This is the worst revision of Payrolls in decade. As I wrote earlier in one of my articles about birth / death model of firms, the weird point in calculations is the assumption that for every company going out of business which skews the data to the downside there is one new unobserved firm that creates new jobs and skew the jobs growth to the upside. Both forces basically compensate each other. Obviously, the effect of the departure and arrival of new firms to the economy can be greatly distorted when one of the trends overweighs.
– Late Thanksgiving celebrations – in the end of November.
– At the current, low unemployment rate, the time and costs for training of new candidates increases which may basically constrain wage growth.
In general, the data collected speaks in favor of positive surprise in today’s NFP report.
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