What to focus on in NFP

The jobs market is forecast to remain heated but continues to trend towards cooling. No major upset to derail the Fed is forecast.
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Labour market tight but loosening

October US non-farm payrolls are forecast to come in at 200K, down from 288K reported in September. Before covid, that would have been considered a generally good and normal result for the start of autumn. The unemployment rate has been down to 3.5%, matching the best results pre-pandemic, which had been the best result in nearly half a century.

It's safe to say the US labour market remains tight, but it might be starting to show signs of loosening. The unemployment rate is forecast to tick up to 3.6%, with the participation rate remaining steady at 62.3%. The annual change in average hourly earnings is expected to drop to 4.7% compared to 5.0% last month (compared to the latest inflation at 8.2%).

ADP offers hope despite increasing open jobs

The initial thought of a slight increase in unemployment and a drop in average hourly wages might imply that softness in the economy is finally being felt in the jobs market. But a closer look at Wednesday's ADP jobs report for October shows that most job ads during the month were in hospitality and leisure, which typically has lower average wages. Just like average hourly income increased due to statistics during the pandemic when restaurants and hotels were closed, that phenomenon could be repeating now as those businesses experience the summer season without covid worries.

There is still a significant gap between job seekers and open jobs. In September, there were 10.7M jobs open, but only 6.1M people were looking for employment. The presumption is that higher inflation will push workers back onto the market, which would likely be reflected first in the consumer and hospitality market. For now, however, the ratio of job seekers and open jobs remains at a multi-decade low, leaving the Fed plenty of room to keep hiking without worrying about the jobs market.

Eurodollar heading to breakout point

EUR/USD appears to be in a falling flag pattern, heading towards the lower end near 0.9750 (S1). A breakout is expected to confirm the structure, opening the door to a 650-pip (H=1.02- 0.9550) drop from the breakout point down. Initially, a bounce could be seen at the flag low, but without a move past the Sept 6 low at 0.9865 (R1), the pair is unlikely to revisit parity (R2). In the unlikely event, however, recapturing 1.01 (R3) might bring 1.02 (R4) back into focus. Otherwise, losing 0.9630 (S2) and the record low of 0.9550 (S3) will increase the chances of the 650-pip extension near 0.89 (S4).

Key takeaways

The US non-farm payrolls for October are expected to come in worse than last month, but the unemployment rate is still relatively low. The labour market is still tight, but it might be starting to loosen up as unemployment is forecast to tick up and wages are expected to drop. However, the latest ADP report showed that most job growth was in hospitality and leisure, which typically have lower wages. There is also a large gap between job seekers and open jobs, and inflation could push workers back into the market.