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Smart News - It’s Non-Farm Payroll time again

Market Update

It’s Non-Farm Payroll time again

Last week the market buzz focused on central bankers as the annual Jackson Hole Economic Symposium took place. The event gave Jerome Powell, Chair of the US Federal Reserve, an opportunity to announce a new approach to tackling inflation, or rather the lack of it, across the US and other major developed countries.

Over a surprisingly poor connection (the symposium was attended remotely) Mr Powell outlined how the US central bank is adopting “average inflation targeting”. This is a change from the previous Federal policy of aiming for a specific 2% inflation target, as measured by the central bank’s preferred inflation metric, the Core Personal Consumption Expenditures (Core PCE) index. Average inflation targeting means that the Fed is happy for Core PCE to push above 2%, possibly for an extended period, before it will step in and tighten monetary policy. In effect, it will let the US economy run hotter for longer. The overall takeaway from the financial commentariat was that the Fed can now justify continuing with its loose monetary policy as it will be happily allow inflation to push higher for years to come to offset all the time it has come in below target.

More stimulus?

The news led to a bounce in precious metals as investors ditched dollars and hoovered up inflation hedges. But some analysts were quick to ask just how much stimulus would be needed to break above 2%, given the Fed’s continued inability to hit target despite the extraordinary measures taken over the last 11 years. Of course, this time round the US government is providing fiscal stimulus as well, and that could make a significant difference.

On the other side of the discussion, commentators were warning that the US central bank should be careful what it wished for. History tells us that once you really get inflation going, it can be very difficult to stop. But the story as far as markets are concerned is that Jerome Powell’s speech reinforced the faith investors have in ample and predictable liquidity support. This explains the ongoing rally in company shares whose values have, in many cases, completely decoupled from economic and corporate fundamentals.

Payroll report

Investor attention now turns to the upcoming employment data in the form of Friday’s Non-Farm Payroll (NFP) release. The monthly NFP report is arguably still the most important economic data release on the calendar. Employment, or the lack of it, in the world’s largest economy is obviously a big issue. Striving to achieve ‘maximum employment’ is also one half of the Fed’s dual mandate. The other being its inflation targeting. But the Non-Farm Payroll data lost a lot of its impact during the coronavirus pandemic as the monthly swings became so wild and unwieldy that it became difficult to read much into each release. That is less the case now, as we’re nearly six months on from the peak of the crisis. Friday’s number will have additional significance as it is the penultimate measure of the US jobs situation ahead of the Presidential Election in early November. Given Donald Trump’s emphasis on a strong economy and a soaring stock market, he will jump on a good number as evidence of his outstanding ability to ‘Make America Great Again’.

In terms of what to expect, the consensus is coalescing around an increase of 1.4 million jobs in August. If so, this would represent a decline from July’s job gains of 1.76 million. On the plus side it would mean that the US has seen an increase of around 10.4 million jobs over the last four months. But there are still 10.8 million US citizens who have been unable to get back into employment after losing their jobs at the beginning of the crisis. This unfortunate fact was borne out to some degree on Wednesday when the ADP report on private non-farm payrolls was released. This showed job gains of just 428,000 – well below the 1.25 million anticipated. While the ADP number is a poor guide to the government’s payroll data, it’s worth noting that this is the second successive month where there has been a substantial miss to the forecast numbers.

Furloughs ending

But, as with the UK, the real unemployment picture in the US won’t be established until we see what happens when various furlough schemes finally expire. As a shocking example of what could be in store, last week hospitality giant MGM Resorts laid off 18,000 staff members, a quarter of its US workforce. These were furloughed employees that had not been brought back to work after six months. This is a worrying sign that more losses will come as furloughs implemented early in the pandemic turn into permanent layoffs. If this kind of action is repeated across the US, then it doesn’t bode well for employees as we head into the year-end. On top of this, the US Bureau of Labor reported that a further 1 million US citizens applied for unemployment benefits last week. More than 14.5 million are now collecting traditional jobless benefits, compared to 1.7 million this time last year.

In conclusion, there are a lot of moving parts to consider in the US employment outlook. While it’s not the top topic yet on social media, we can expect interest to pick up as we approach Friday’s release. So, make sure you click on the Smart News widget in the bottom right corner of the trading platform. Then open this week’s ‘Highlights’ feed. This is where you’ll get the news first, along with the opinions of some of the most influential voices on social media.


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