A Review of the June Non-Farm Payrolls Report

The June NFP report triggered a lot of volatility, but there was little in terms of directional movement, so it’s time to dig a little deeper into the NFP report to see if we can find a reason why.

USD Index: 15-Minute Forex Chart

USD Index: 15-Minute Forex Chart

Upside surprise in June, but…

  • June non-farm payrolls: 287K vs. 175K expected, 11K previous
  • May non-farm payrolls: downgraded to 11K vs. 38K originally

In my Forex Preview for the June NFP report, I revised my conclusion after the ISM non-manufacturing report and the ADP report came out to read that: “the available labor indicators seem to be skewed towards the possibility of an upside surprise.” And we sure got an upside surprise all right, since non-farm employment saw a net increase of 287K jobs, which is way higher than the +175K consensus and is the highest reading since the 295K net increase that was printed back in October 2015.

It wasn’t all sunshine and rainbows, however, since the already dismal reading for May was downgraded from 38K to 11K, which is the first clue as to why the Greenback retreated after rallying hard on the better-than-expected NFP reading.

Earnings miss expectations

  • Average hourly earnings m/m: 0.1% vs. 0.2% expected, 0.2% previous
  • Average hourly earnings y/y: 2.6% vs. 2.7% expected, 2.5% previous

I advised you in my Forex Preview to “keep in mind that if the actual numbers are above 100K, chances are good that the forex traders will shift their focus on other labor indicators after the knee-jerk reaction, with wages being the likely target.” And as it turns out, that was a good advice since wages failed to meet expectations,as you can see on the bullet points above. By the way, the monthly reading is rounded up. Average hourly earnings actually only grew by 2 cents to $25.61, which is a 0.08% increase.

Participation rate climbed higher, but…

  • Jobless rate: climbed to 4.9% vs. 4.8% expected, 4.7% previous
  • Labor force participation rate: ticked higher from 62.6% to 62.7%

On a more upbeat note, the labor force participation rate climbed higher to 62.7% after sliding to a six-month low of 62.6%, which, as the name implies, means that more Americans participated in the labor force. But on a more downbeat note, the jobless rate climbed higher at a faster-than-expected pace to 4.9%, which implies that the U.S. economy wasn’t able to absorb the influx of people joining (or rejoining) the labor force. Specifically, the civilian labor force increased by 414K to 158,880K, but the number of employed people only increased by 67K to 151,097K while the number of unemployed people jumped by a whopping 346K to 7,783K.

Oh, if you’re puzzled by the fact non-farm payrolls increased by 287K but total employment only increased by 67K, just know that the NFP report is actually based on two separate surveys (Establishment and Household), with non-farm payrolls and earnings being based on the Establishment Survey while the jobless rate and participation rate are based on the Household Survey. The Household survey is more expansive since it also includes agricultural workers, self-employed workers whose businesses are unincorporated, unpaid family workers, private household workers, and workers who hold multiple jobs. There are also differences in statistical calculations voodoo, so disparities are to be expected.

Manufacturing gained jobs, but…

The higher-paying manufacturing sector added around 14K jobs in June, so both the ISM and Markit PMI reports were right on the money while the ADP report missed by a very long shot since it reported a decrease. Anyhow, this looks great on the surface, but if you look at the tables below, the increase in jobs was not broad-based. Also, note that the food manufacturing industry was the one that contributed the bulk of the increase. Why does that matter, you ask? Well, the food manufacturing industry is on the lower end of the manufacturing sector in terms of wages. For reference, the average hourly earnings for the entire manufacturing industry is $25.96, while the average hourly earnings for the food manufacturing industry is $19.92.

June NFP: Durable Goods Manufacturing

June NFP: Non-Durable Goods Manufacturing

Stronger jobs growth in the service sector, but…

As usual, the service sector was the main driver for jobs growth in June, providing a net increase of 256K jobs. Incidentally, the number of service sector jobs generated in May was downgraded from 61.4K to 35K, which is the main reason why the NFP reading for May was downgraded from +38K to +11K. Getting back on topic, the increase in jobs was broad-based, with only the transportation and warehousing industry reporting a net decrease in jobs, which is great.

June NFP: Services

What’s not so great, however, is that a large chunk of the job gains come from lower-paying industries, namely retail trade, administrative and waste services, arts and recreation, and and accommodation and food services. This increase in low-paying jobs (minimum wage even) is the mostly likely reason why wage growth decelerated. And while the large increase in jobs for the higher-paying information industry looks goods, the increase is mainly due to about 35K workers going back to work after the massive Verizon strike.

Final Thoughts

Overall, the NFP report was mixed, but the jump in non-farm employment really stood out after the previous month’s dismal reading, so the initial reaction was to buy up the Greenback. That was the only the upbeat part of the NFP report, though, since earnings and the jobless rate disappointed and the previous NFP reading was downgraded to boot. Also, the details of the jobs numbers weren’t really all that upbeat since a large chunk of the job gains came from lower-paying industries, so consumer spending isn’t likely to pick up on that, which is why forex traders then dumped the Greenback after the initial knee-jerk reaction.

Not only that, the DOW surged and ended the day 1.40% higher while the S&P 500 closed 1.53% higher after briefly touching record highs. This implies that the market is not expecting a rate hike anytime soon. And according to the CME Group’s 30-day Fed Fund Futures, there is a 98.8% probability that the Fed will keep the key policy rate on hold during the July FOMC meeting and it remains in the +90% probability all the way to the November meeting, which is another sign that the market is not expecting a rate hike anytime soon. The NFP report did reduce the probability of a July rate cut from 3.6% to just 1.2%, though, so that’s a good thing at least.

CME Group Fed Funds Rate

Source: CME Group

It’s not clear from the chart of the USD index that I posted earlier, but the Greenback actually had a mixed performance after the roller coaster price action in the aftermath of the NFP report, since the Greenback advanced against the Loonie and the Swissy while succumbing to the Aussie and the Kiwi and trading mostly sideways against the yen, the euro, and the pound. Having said that and given the details of the NFP report, what’s your current trading bias for the Greenback? Share your thoughts by commenting or answering the poll below!

 



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