US payroll shock weighs on Fed's lift-off

Surveys showed that respondents were about evenly split on US Fed's September versus December hike, and the December call had to be defended against claims that the Fed was ready for liftoff.

On October 2, the Employment Report for September pushed market expectations of the first hike well into 2016. In contrast, the report published on the second of October showed a downward revision to 223K in July and 136K in August, followed by a 142K print for September. 

"This suggested that the slowdown in China and other emerging economies had reached the US shores. Expectations of a December rate hike evaporated and many banks decided to change their call to somewhere in 2016", says Rabobank.

The margin of error for the nonfarm payroll growth figure is 100K. This means that the difference between the August-September figures and the preferred 200K growth rate is not statistically significant. Each new Employment Report provides revisions of the previous two months, as additional information is incorporated in the estimates. 

These revisions can be substantial and can change the message given by previous editions of the Employment Report. In fact, this is exactly what happened on October 2. The improvement in the employment index stands in sharp contrast with the slowdown of nonfarm payroll growth in the services sector to 164K from 211K in the Employment Report. 

Given the large margin of error, the substantial revisions and the dissonance with other labor market data, it can be misleading to rely too much on this single Employment Report. There will be two more reports before the December meeting.

"In addition to these statistical issues, one should know if 142K is a bad figure for employment growth, in particular in the eyes of the FOMC. What is the Fed's threshold for employment growth? While the Committee prefers 200K, several participants indicated earlier this year that 150K is acceptable, as long as the slack in the labor market continues to fall", opines Rabo Bank. 

In fact, San Francisco Fed President John Williams repeated last week that the US needs only 100K new jobs a month. He also repeated that he sees a rate liftoff in 2015. Now he is regarded as a centrist and the doves probably still would like to see 150K job growth.