Forex Preview: U.S. NFP Report (Apr)

We’ve got another NFP Friday coming our way, forex friends! If you plan to trade this top-tier event and need to get up to speed on what happened last time and what to expect, then gear up by reading up on my Forex Preview for the April NFP report.

What happened last time?

  • Non-farm payrolls: 215K vs. 202K expected, 245K previous 242K
  • Average hourly earnings: 0.3% vs. 0.2% expected, -0.1% previous
  • Jobless rate: ticked higher to 5.0% vs. steady at 4.9% expected
  • Labor force participation rate: climbed higher to 63.0% vs. 62.9% previous

In my previous Forex Preview for the NFP report, I ended my write-up by saying that “the available leading labor indicators and reports seem to support another healthy round of job increases, so the consensus readings seem about right.” However, I also said that there’s “a possibility that the net increase in employment will try to match or exceed” the previous month’s reading, and that “wages may have grown slightly, at least in the labor-intensive service sector.”

Well, it turns out that we did see an upside surprise (though it did not meet or exceed the previous reading) since the non-farm employment in March saw a net increase of 215K, which is much better than the 202K expected. Not only that, wages grew at a slightly faster-than-expected pace, increasing by 0.3% when it was only expected to increase by 0.2%.

A closer look at the details of the NFP report shows that most of the job gains came from the service sector (+199k jobs). But an even closer look at the service sub-sectors show that a large chunk came from low-income (minimum wage even) industries such as retail trade (gasoline attendants, sales clerks, etc.), food services and drinking places (waiters, bartenders, McDonald’s burger flippers, etc.), and service to dwellings and buildings (janitors, plumbers, pest exterminators, etc.).

Also, the higher-paying manufacturing sector lost 29K jobs, which is the largest number of jobs shed since 2009. And the job losses were broad-based to boot since 15 of the 20 manufacturing sub-sectors reported job losses.

Moving on, the jobless rate ticked higher to 5.0% from 4.9% despite the larger-than-expected net increase in jobs. This was very likely due to the labor force participation rate ticking higher for the fourth consecutive month to a two-year high of 63%. This is great because Americans are being encouraged (or forced) to find work again, but it’s also kinda bad because the U.S. economy was unable to fully absorb the influx of workers who joined (or rejoined) the labor force.

Overall, the March NFP report looked pretty good on the surface, but was not as upbeat when you dig through the details. Initially, the Greenback shot up pretty much across the board when the NFP report was released. The Greenback did have some difficulty against the yen because of the prevalence of risk aversion at the time, but it was able to win out in the end.

However, the Greenback’s victory was short-lived and it began giving back its gains, probably because forex traders took a hard look at the details of the NFP report and concluded that it wasn’t as awesome as it looked on the surface.

USD/JPY 15-minute Forex Chart

USD/JPY 15-minute Forex Chart

What can we expect this time?

  • Non-farm payrolls: 200K expected vs. 215K previous
  • Jobless rate: expected to tick lower to 4.9% from 5.0%
  • Average hourly earnings: 0.3% expected, same as last time

For April’s NFP report, non-farm employment is expected to print a net increase of 200K, which is a tad lower than March’s 215K. Meanwhile, the jobless rate is expected to tick lower to 4.9% while wages are expected to grow by 0.3%, which is the same rate of growth as last time.

Looking at the available labor market indicators, Markit’s final manufacturing PMI for April dropped to 50.8 from 51.5, which is the weakest reading since September 2009. Commentary from the manufacturing PMI report was also pretty bleak, saying that there was “near-stalling of payroll numbers in April, with the rate of job creation the weakest for just under three years.”

Markit’s services PMI reading is more upbeat since it climbed to a three-month high of 52.8 (51.3 previous). Despite the higher services PMI reading, however, commentary from the report noted that “the latest survey pointed to softer job creation at service sector companies. Moreover, the rate of employment growth was the weakest seen since December 2015.” Hmm. Not upbeat for employment at all.

Moving on, ISM’s manufacturing PMI reading for April slid to 50.8 from 51.8, but the employment sub-index increased from 48.1 to 49.2. It’s still below the 50.0 stagnation level, though, which means that employment still contracted, albeit at a slower pace when compared to last time.

Meanwhile, ISM’s non-manufacturing PMI reading showed an improvement from 54.5 to 55.7. And the employment sub-index was following suit, advancing from 50.3 to 53.0. The improvement in employment levels is not broad-based, though, since five non-manufacturing industries reported lower employment levels versus ten industries who reported higher employment levels, with the rest reporting little to no change.

The five industries that reported lower employment levels are (1) mining, (2) other services, (3) educational services, (4) retail trade, and (5) transportation & warehousing. The reduction in employment from retail trade and educational services are particularly distressing since those two combined contributed 98.7K of the 199K jobs provided back in March by the service sector.

Finally, ADP’s non-farm employment report came in at 156K, much lower than the 205K expected and the previous reading of 194K (downwardly revised from 200K).

Overall, the available leading indicators seem to point towards slower employment growth in the service sector while the employment situation in the manufacturing sector is a bit more mixed. It is therefore likely that April’s net increase in non-farm employment is gonna be lower when compared to March, so the consensus reading seems about right, but chances are also skewed more towards a possible downside surprise.

As usual, make sure to keep a close eye on wage growth since a weaker-than-expected reading may convince forex traders, especially the interest rate junkies, to send the Greenback lower, even if the other readings are within or beat expectations.