The prospect of a rate hike from the US Federal Reserve this year is now back on the table, after a brief hiatus in recent weeks. Recent remarks from Fed chair Janet Yellen has seen the odds for rate increase in December rise to as high as 60%, presenting another mouthwatering, nerve-jangling period for financial markets in the weeks ahead.
Every data release in the US is now going to be intensely scrutinised, particularly towards the labour market. It’s been said before, but October’s non-farm payrolls release, out this Friday, is now seen as a make-or-break event in terms of the near-term outlook for rates.
While September’s non-farm report was about as underwhelming as one can get, recording job growth of just 142,000 with no wage growth, Tom Fitzpatrick, Shyam Devani, Dan Tobon and Gregory Marks, analysts at Citi, believe that there are grounds for a sharp recovery in payrolls growth in October, along with a potential large upward revision to September’s lacklustre job figure.
They’ve been scouring the history books, and based off patterns seen over the past 17 years, they believe a bullish payrolls report may be on the cards come Friday.
They point the the likelihood that job growth in October will be “just above 200,000”, above the current consensus forecast for 180,000, with “an upward revision of the Sept number to around 186,000”.
Here’s the basis for their call:
Of the 17 initial September NFP numbers going back to and including 1998:
- 12 have been revised higher on the first revision.
- 4 have been revised lower on the first revision. Those 4 were in 2000‐2001 and 2007‐2008. These were both periods of extreme market stress and some economic stress (2000‐2001: Nasdaq bubble burst; S&P fell 50%; 9/11 disaster, US had a “growth recession”. 2007‐ 2008: Housing collapse,equity market collapse, banking crisis, the great recession etc)
- 1 had no revision (1998). While this is a period we are focused on the dynamics then were much worse than today (Russia default, Asia meltdown, LTCM collapse, Equity market fell 22% into October etc). In addition that number did ultimately get revised up in subsequent revisions to 223,000 from the original 69,000 whereas the final numbers for 2000‐2001 and 2007‐2008 remained below the initial prints.
- Of the 12 upward revisions (first revision) over this period the average upward adjustment was 44,000 which if seen would take the September number back close to 186,000
- On 12 of those 17 occasions we have also seen a higher October initial print than the initial print posted in September. Excluding large outliers, the average October print has been 59,000 higher than September, pointing to a figure of around 201,000 on Friday
While using history to determine future outcomes is fraught with danger, just ask all those analysts who were predicting a huge upward revision to August’s non-farm payrolls number which was actually revised lower, bucking historic trends, Citi have form on the board, correctly predicting that September’s payrolls figure of less than 150,000 was “very likely”.
If that form carries through to October and payroll increase strongly with large upward revisions (along with a bit of wages growth), it’s likely that the odds of a rate hike in December, already a narrow favourite, will hit unprecedented levels.
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