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

Hello, forex friends! The last NFP report before the June 14-15 FOMC meeting is gonna be released this Friday (June 3, 12:30 pm GMT), so get ready by reading up on another edition of my Forex Preview because chances are very good that the Greenback will get a volatility infusion then.

Update [June 2, 3:00 pm GMT]: Added ADP report and ISM manufacturing PMI to analysis. Also modified conclusion a bit, but still slightly skewed towards a possible downside surprise. Wages will likely still be the labor indicator in focus, though.

What happened last time?

  • Non-farm payrolls: 160K vs. 200K expected, 208K previous
  • Average hourly earnings: 0.3% vs. 0.3% expected, 0.2% previous
  • Jobless rate: held steady at 5.0% vs. tick lower to 4.9% expected
  • Labor force participation rate: dropped from 63.0% to 62.8%

I concluded my Forex Preview for the April NFP report by saying that “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.”

Well, we got a downside surprise alright since non-farm employment only saw a net increase of 160K, which is way fewer than the 200K consensus. Also, the 160K figure is the smallest net increase in seven months. In addition, the previous reading was downgraded from a net increase of 215K to 208K.

The weaker than expected net increase in jobs also ensured that the jobless rate would hold steady at 5.0% instead of ticking lower to 4.9%. However, a closer look at the details of the NFP report showed that the jobless rate could have ticked higher since the labor force participation rate actually dipped from a two-year high of 63% to 62.8%, ending the labor force participation rate’s four-month uptrend in the process.

The details of the NFP report weren’t all doom and gloom, though, since the higher-paying manufacturing sector finally saw a net increase of 4K jobs after two straight months of jobs shedding. The service sector also continued to provide jobs, and the higher-paying professional and business services industry accounted for 65K of the 174K jobs provided by the service sector, which is another piece of good news. These two developments probably helped to ensure that wages would grow at 0.3% as expected, which happens to be a slight improvement over March’s 0.2% increase.

Overall, the employment situation in April was a bit bad, but there were some bright spots with regard to wages and the quality of the job gains. And it looks like forex traders were focusing on those bright spots because the Greenback dipped hard on the poor headline readings before performing a U-turn and steadily climbing higher. It probably helped that New York Fed President William Dudley commented in an interview with the New York Times that the weaker-than-expected increase in non-farm employment didn’t significantly affect his own economic outlook and that it’s still a “reasonable expectation” that the Fed is on track to hiking rate twice this year.

USD index: 15-minute Forex Chart

USD index: 15-minute Forex Chart

What do forex analysts expect?

  • Non-farm payrolls: 163K expected vs. 160K previous
  • Jobless rate: expected to tick lower to 4.9% from 5.0%
  • Average hourly earnings: 0.2% expected vs. 0.3% previous

For this Friday’s NFP report for May, non-farm employment is expected to have a net increase of 163K, which is is only a slight improvement over 160K jobs gained in April. Meanwhile, the consensus for the jobless rate is that will tick lower to 4.9% from 5.0%. As for wages, they are expected to grow by 0.2%, which is a slightly slower pace of growth compared to last time but still an increase nonetheless.

The all-important ISM non-manufacturing PMI will be released on the same date as the NFP report, so we’re kinda handicapped on this one.

Anyhow, Markit’s final manufacturing PMI for May slid slightly from 50.8 to 50.7, which is the weakest reading since September 2009. Commentary from the manufacturing PMI report was rather downbeat to boot. First off, manufacturing output fell for the first time since September 2009, thanks to weaker demand brought about by uncertainty on the general economic outlook. The weaker demand meant that new business growth grew at the weakest pace in 2016 so far. But despite all that, the manufacturing sector was able to add to their payroll numbers, but the increase was only marginal.

Next, Markit’s flash services PMI reading offered no respite since it dropped to a three-month low of 51.2 from 52.8 since the service sector was apparently suffering from weakened demand as well. Commentary on the employment situation in May was pretty bad, too, since jobs growth only increased marginally. In fact, the increase in payroll numbers “has now slowed in three of the past four months, with the latest upturn the weakest since December 2014.” The weak jobs growth could translate to a “nonfarm payroll rise of just 128,000 in May.” Not happy news indeed.

Moving on, ISM’s manufacturing PMI reading for May advanced from 50.8 to 51.3, but the employment sub-index held steady at 49.2. A closer look at the details show that 10 put of 18 manufacturing industries were able to eke out some job gains, so manufacturing has a chance of contributing jobs yet again.

As for ADP’s non-farm payrolls survey for the May period, it reported a net gain of 173K jobs, which is within expectations and more than the upwardly revised 166K jobs gained in April (156K originally).

The details of the ADP report contradict the PMI reports, though. For example, the PMI reports are implying that there was marginal job growth in the manufacturing sector while the ADP report, well, reported a net loss of 3K jobs after shedding 13K in April. And remember, the April NFP report actually printed a small gain in manufacturing jobs.

Overall, the available leading indicators seem to point to another marginal contribution from the manufacturing sector while Markit’s services PMI report is saying that employment growth in the service sector weakened to the point that the service sector is expected to generate only 128K in May (+174K April NFP). Given all that, chances are skewed slightly towards a downside surprise. However, we don’t have ISM’s non-manufacturing PMI to corroborate this, so I’m not too confident on my conclusions.

In any case, it’s possible that non-farm payroll numbers won’t matter as much, just like last time. After all, U.S. Fed Chairperson Janet Yellen herself said that “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month,” so employment conditions are still relatively okay as long as employment growth does not go below that 100K floor. Of course, the more the merrier.

In addition, the minutes of the April FOMC meeting, together with Yellen’s May 27 speech, already revealed that Fed officials were not too happy with wage growth, so wage growth would likely be the labor indicator that most forex traders would have their sights on, so keep that in mind.