CBA: History provides an ominous warning for tonight's US payrolls report

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It’s the first Friday of the month, and nothing much is doing in Asia. Everyone is waiting for the release of tonight’s US non-farm payrolls report for August.

It’s an event that always generates significant market volatility, and this report will be no exception. Indeed, given increased speculation over a near-term interest rate hike in the US following last week’s Jackson Hole central bank symposium, the volatility accompanying this report could be even greater than normal.

A hike this year, seen as unlikely prior to Jackson Hole, is now seen as more likely than not, albeit by a slim margin. Many believe this report will hold the key as to whether or not that occurs, perhaps as soon as three weeks time.

Later this evening, the answer to that question will almost certainly be known, especially when it comes to the likelihood of a rate increase in September.

In attempt to uncover what is likely to arrive this evening, Elias Haddad, senior currency strategist at the Commonwealth Bank, has been scouring the history books for answers, and what’s he uncovered doesn’t bode well for those banking on a near-term rate hike.

Not. One. Bit.

According to Haddad, not only does August payrolls growth tend to underwhelm — fitting with research by Westpac earlier this week — wage growth, a key ingredient in terms of helping to build inflationary pressures, could also disappoint due to the day the jobs data for this survey was collected.

Here’s what he uncovered:

  • From a historical perspective, the first estimate of US August non-farm payrolls have underwhelmed the market consensus in 15 of the past 19 years. Over the past five years, the initially reported increase in August non-payrolls averaged only 116k compared to the consensus prediction of 168k. The reason for the systematically weak August could be poor seasonal adjustment generated by a lower response rate in the holiday month and/or difficulties due to the timing of the start of the new school year. In fact, August is the most upwardly revised month from the initial estimate.
  • In the past, there has been issues regarding the day of the week the 12th of the month falls on in the August report. Note that the US employment data, compiled by the Bureau of Labor Statistics, refer to persons on establishment payrolls who worked or received pay for any part of the pay period that includes the 12th day of the month.
  • If the 12th falls later in the week, the average hourly earnings data has had a tendency to disappoint. This could be a function of the 15th of the month (a common payday for many US workers) falling outside the survey period. Ominously, the 12th of August was a Friday. Since 2006 Friday has been a weekday with one of the lowest average monthly increases in US average hourly earnings.
  • The past 5 times the 12th has been on a Friday the average monthly change in earnings was actually a decrease of US$0.01. This type of outcome would see annual growth in average hourly earnings slow to 2.2%pa in August from 2.6%pa the previous month. While the diminishing slack in the US labour market should theoretically support wage growth, the calendar quirk in the data could be a major hurdle.
  • Indeed, to generate a positive surprise in annual average hourly earnings growth in August 2016 (consensus 2.5%pa) there needs to be a US$0.08 or more rise in the month (assuming no revisions). Looking back, this type of monthly outcome hasn’t occurred when the 12th was a Friday since at least 2006. Overall, monthly rises of US$0.08 or more have only occurred 20% of the time in the past 10 years (25 of the past 124 months).


Not only does payrolls growth have a history of disappointing in August, the fact the data was collected on a Friday points to the likelihood of an undershoot in wage growth.

“If history repeats on Friday and August non-farm payrolls gains significantly underwhelm expectations and average hourly earnings growth slows, the pricing for a September Fed funds rate hike will fall further and the USD would unwind its post-Jackson Hole rally,” he says.

Many will be hoping that history doesn’t repeat.

The payrolls report will arrive at 8.30am EDT (10.30pm AEST).

Haddad is also our guest on the Devils and Details economics podcast this week, which you can find on iTunes, or listen in below.

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