Tomorrow at 8:30am ET, the BLS will release the September jobs report: payrolls are expected to dip to 185k from 201K and in line with the three month average of 185K. However with record low unemployment and a bubbly labor market fueled by Trump's stimulus, where labor shortages are said to be the biggest concern to companies, absent some "force majeure" in the words of Elon Musk, markets will ignore the payrolls print and focus squarely on average hourly earnings to see if last month's inflationary wage pressures (+2.9% Y/Y) persist, rise even further - which would instantly spike yields - or fall.
Here are Wall Street's consensus expectations:
- Non-farm Payrolls: Exp. 185k, Prev. 201k
- Unemployment Rate: Exp. 3.8%, Prev. 3.9% (NOTE: the FOMC projects unemployment will stand at 3.7% at the end of 2018)
- Average Earnings Y/Y: Exp. 2.8%, Prev. 2.9%
- Average Earnings M/M: Exp. 0.3%, Prev. 0.4%
- Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs
- U6 Unemployment Rate: Prev. 7.4%
- Labor Force Participation: Prev. 62.7%
When it comes to the one number that matters most, average hourly earnings, one bank is pessimistic. Looking at the historical record, Citi notes that we have almost always, since 2010, printed 0.1% or below in the month following a print of 0.4% or larger. YoY number will see a 0.5% roll off from last September and as such a print of 0.1% will give us a 2.5% YoY print short of the 2.8% YoY expectations. A 0.1% AHE number could promptly reset the recent inflationary expectations and send yields sliding.
Arguing the bullish case is Goldman, which expects a strong September employment report overall (+174K payrolls, below the 185K consensus) with a decline in the unemployment rate, firm average hourly earnings, and a pickup in the underlying pace of payroll growth despite a temporary drag from Hurricane Florence. Goldman also expects upward revisions to August job growth and a sizeable rebound in the household employment measure are more likely than not; it also expects a temporary drag of around 33k from Hurricane Florence, which struck the Carolinas during the payroll reference week. The bank's economists see scope for a rebound in household employment and labor force participation, as "both measures were depressed in August by seasonal adjustment difficulties related to youth summer jobs." Finally, Goldman expects average hourly earnings to increase 0.3% month over month in tomorrow’s report, reflecting a boost from calendar effects and possibly a temporary bump from the hurricane; the year-over-year rate is expected to fall by two tenths to 2.7%, though unlike Citi, Goldman said "the risks to that forecast are skewed to the upside."
More details on what to expect tomorrow, courtesy of RanSquawk:
HURRICANE FLORENCE/INITIAL JOBLESS CLAIMS: Initial jobless claims declined to a new cyclical low of 202k in the NFP survey week, falling from 210k in the August NFP survey period, which augurs well for Friday's official payrolls data. Some desks have suggested that the impact of Hurricane Florence could negatively impact September's labour market data. However, Deutsche Bank argues that this may not been the case this time around. "Typically the impact shows up in the initial jobless claims data, but this was not the case last month," Deutsche Bank writes, "in fact, claims for the September survey week fell to 202k, the lowest level since late 1969. The bank notes, however, that jobless claims did jump up to 215k in the subsequent week ("still low"), with the increase due to rises in North and South Carolina, the states which bore the brunt of the storm; DB said this hints at potential downside risks to its 190k forecast for the headline nonfarm payrolls. But with that said, Deutsche says that any material downside miss is likely to be made up in the months ahead as reconstruction efforts get underway.
WAGE GROWTH: Deutsche Bank also argues that the Hurricane is not expected to have an outsized impact on average hourly earnings. If anything, compositional issues suggest that there could be upside risks, pointing to last year's Hurricanes Harvey, Irma and Maria, which helped lift the September 2017 average hourly earnings data. "The reason for this is that extreme weather events are more likely to displace relatively lower income workers, such as those in the leisure and hospitality industry, thus artificially goosing the average wage overall," Deutsche says, adding that any potential spike in earnings would likely be reversed in October.
ADP PAYROLLS: There was no evidence of a negative hurricane impact in the in the latest ADP payrolls data, where 230k nonfarm payrolls were added to the US economy in September, surpassing expectations for 185k; the previous month's data was also revised higher by 5k. "The job market continues to power forward," Moody's chief economist Zandi said, "employment gains are broad-based across industries and company sizes. At the current pace of job creation, unemployment will fall into the low 3%’s by this time next year." Pantheon's analysts noted that the data was consistent with all the very strong surveys, including the ISMs, JOLTS and NFIB hiring intentions, but it probably overstates the official data, explaining that "ADP counts names on payroll lists, regardless of whether people were paid anything in the survey period, but the official data only counts people who were paid - anything - in the survey period, adding that "so part-time hourly paid people who were kept away from work by the storm and, hence, did no paid work in the survey week, will temporarily drop out of the official numbers, but continue to be counted by ADP."
LAY-OFFS: US employers announced 55,285 planned job cuts in September 2018, rising from 38,472 announced in August, and sharply above the 32,346 cuts announced in September 2017. Challenger noted that around half of the intended job cuts were a result of Wells Fargo, which said it would cut between 5-10% of its workforce over a three-year period (which could see 26,500 jobs shed). "As the job market remains near full employment and companies struggle to find workers, large-scale job cut announcements like the one from Wells Fargo will actually provide the workers necessary for companies to gain momentum and sustain growth,” Challenger said, adding that “with the exception of Wells Fargo, low job cut announcements indicate employers are holding on to their staff in a period of expansion."
BUSINESS SURVEYS: Both the manufacturing and nonmanufacturing surveys were solid, with the employment subindices rising for both. For the non-manufacturing sector, the employment sub-index rose by 5.7 points to the highest since the inception of the sub-index in 1997. The manufacturing ISM's employment metric ticked up by 0.3 points to the highest since February 2018. "Respondents continued to note labormarket issues as a constraint to their production and, more significantly, their suppliers’ production capability," ISM said. Markit's PMI also noted strong labour market activity, stating that services providers suggested greater business requirements were driving job creation, extending the current sequence of employment growth that began in March 2010, and notably, Markit said that September hiring rose at the quickest rate since June 2014.
MARKET REACTION: US rates jumped significantly on Wednesday, driven by better ADP and ISM nonmanufacturing surveys, which painted a solid picture of the US labour market, which nods to the FOMC continue its path of policy normalisation. In terms of a market reaction to the Employment Situation Report, TD Securities says USD should take its cue from the rates market: "The recent melt-up in rates and long USD positioning highlights the asymmetry in reaction should wages fall short of expectations. USDJPY should be the key barometer for broader G10FX, and we would expect 115.00 to be formidable resistance." On rates, TD says the reaction will be driven by the wages data: "Payrolls pose binary risks for rates after the significant bear-steepening of the curve in recent days," adding that "given market pricing, we see a bigger rate reaction on a disappointment."
A quick side note on the ISM non-mfg survey: as we discussed earlier, if payrolls follow the employment component, tomorrow's jobs number should print in the 500,000 range, the highest since 1983. If that happens, look for 10Y yields to shoot into low earth orbit.
Meanwhile, back to Goldman, the bank lists several factors arguing for a weaker August job report:
- Hurricane Florence. State-level job growth often stalls in the wake of major disasters, and particularly severe hurricanes tend to produce outright declines in the affected states (-0.3% month-over-over on average in our dataset). Florence also struck during the payrolls survey week, as did Hurricane Irma last September which resulted in a 167k monthly decline in Florida payrolls (or -1.9%, see left panel of Exhibit 1). At the same time, the scope of employment disruption appears to have been narrower in the case of Florence, with a relatively smaller decline in electricity usage (that also occurred a bit later on in the survey week, see right panel). Relatedly, over 1 million people were ordered to evacuate the Carolinas by Wednesday of the survey week, whereas 6.5 million Floridians were ordered to evacuate during Irma. We also estimate approximately 20k hurricane-related jobless claims in the Carolinas over the last two weeks (compared to 24k in Florida and Georgia following Irma).
- While uncertainty is high, we estimate that Florence will reduce the level of September payrolls by around 33k (or 0.5% of the 6.7 million nonfarm employees in North and South Carolina). To the extent the hurricane indeed weighs on state-level employment, we would expect a full reversal in October (and perhaps November). The BLS noted a drag from Hurricanes Harvey and Irma in the text of last September’s employment report, and any similar color in tomorrow’s report (as well as the pace of job growth in weather-sensitive industries like leisure and hospitality) will help gauge the actual hurricane impact (the state-level data will not be released until October 19th).
- Job cuts. Announced layoffs reported by Challenger, Gray & Christmas increased by 6k in September to 50k (SA by GS). On a year-over-year basis, announced job cuts rose 20k.
Arguing for a stronger report:
- Service-sector surveys. Service-sector business surveys improved on net in September, with our non-manufacturing employment tracker rising to a new cycle high (+0.5pt to 57.5). In particular, the nationwide ISM nonmanufacturing employment measure surged to a 21-year high (+5.7pt to 62.4). Service-sector job growth rose +178k in August and averaged 151k over the last six months.
- Manufacturing surveys. Manufacturing-sector surveys pulled back on net but they too remain elevated. Our manufacturing employment tracker fell by 1.8pt to 57.8 in September. As shown in Exhibit 2, after sequential moderation in the early summer, employers across the service and manufacturing sectors are now reporting increasingly broad-based gains in employment. Manufacturing-sector payrolls fell 3k in August but have increased 18k on average over the last six months.
- Jobless claims. Initial jobless claims returned to cycle lows on average during the four weeks between the payroll reference periods (206k) and fell to a 49-year low in the payroll reference week (202k). Continuing claims continued to move lower, falling 47k between the survey weeks and reaching a 45-year low during the reference period (1,645k).
- ADP. The payroll-processing firm ADP reported a 230k increase in September private payroll employment—46k above consensus and the fastest pace since February. We view the report as evidence of strong underlying job growth. Importantly though, Hurricane Florence did not appear to affect the report (based on ADP commentary), whereas we estimate a 33k drag on the official BLS measure.
- Job availability. The Conference Board labor market differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—rose 2.3pt to +32.5 in September, a new 17-year high. JOLTS job openings also rose to a new cycle high in the most recent report (6,939k in July).
- Tariff uncertainty. Trade tensions escalated further in September, as the White House imposed a 10% tariff on $200bn worth of Chinese imports on September 24th. However, this occurred after the payroll survey week had already ended (as did the White House announcement on September 17th that these tariffs had been finalized). Accordingly, we do not expect a significant impact on tomorrow’s jobs report.