Given the expectations that are already priced in, the employment data will have to be particularly strong to trigger further sustained dollar gains and an increase in US yields. There will, therefore, be value in fading dollar gains and buying dips in Treasuries if the data is close to or modestly above expectations.
Similarly, the data would need to be exceptionally weak to disrupt December Fed tightening plans and there will be value in buying any sharp dollar dips on any figure in the 110,000-135,000 range, although this would be a very short-term play only given pressure for a wider dollar correction.
Consensus expectations are for a non-farm payrolls increase of around 165,000 for November with an unchanged unemployment rate of 4.9% and increase in hourly earnings of 0.2% for the month.
The initial focus in the employment report will be on whether the data disrupts the Fed’s plan to hike interest rates at the December meeting.
Minutes from the November FOMC meeting and subsequent comments from Fed officials clearly indicate that the Fed is planning to raise rates in December unless there is a major negative event before the meeting and it will need to be a very serious development to trigger a cancelation.
An extremely weak employment report would be a potential barrier to raising rates, although the data would need to be extreme. From the FOMC perspective, an increase in employment of around 120,000 is sufficient to keep the unemployment rate stable.
Any figure around 120,000 would be a disappointment to the Fed and markets, but would not jeopardise a December move. A figure below 100,000 would trigger even more doubts, but there would probably need to be a figure below zero to change the Fed’s mind about December as long as the unemployment rate does not increase sharply.
A relatively weak employment gain would, however, raise fresh doubts whether the Fed will need to tighten aggressively during 2017, which would pose longer-term risks of a more sustained correction in the dollar and yields.
The ADP data recorded an increase in employment of 216,000 for November and any payrolls increase above 200,000 would trigger initial dollar gains with expectations of a more hawkish Fed stance next year, although much of this is already priced in.
The earnings data will be very important within the release, especially from a medium-term perspective. A strong increase in hourly earnings would increase expectations of rising inflationary pressure and an even tighter labour market. A jump in earnings would also tend to put further upward pressure on bond yields, which would underpin the dollar.
Subdued data would keep inflation expectations under control and give fresh ammunition to the FOMC doves. Overall, the dollar will need a monthly earnings increase of at least 0.3% to justify any further momentum.