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

Hello, forex friends! Another non-farm payrolls (NFP) Friday is coming our way (August 5, 12:30 pm GMT). Gear up with another edition of my Forex Preview. And read up on what happened last time, as well as what to expect this time, based on the leading labor indicators.

What happened last time?

  • June non-farm payrolls: 287K vs. 175K expected, 11K previous
  • May non-farm payrolls: downgraded to 11K vs. 38K originally
  • Average hourly earnings m/m: 0.1% vs. 0.2% expected, 0.2% previous
  • 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%

I concluded in my Forex Preview for the June NFP report that “the available labor indicators seem to be skewed towards the possibility of an upside surprise.” And we did get an upside surprise since non-farm payrolls increased by 287K, which is much higher than the 175K consensus.

Everything wasn’t awesome, though. To begin with, the dismal +38K reading for May was downgraded further to an even more dismal +11K, which is the poorest reading since non-farm payrolls declined in late 2010.

Next, a large chunk of the employment gains came from lower-paying industries, which likely dampened wage growth. Average hourly earnings only increased by 0.1% (rounded up from 0.08%), missing expectations that it would grow by 0.2% like last time.

And while the participation rate ticked higher from 62.6% to 62.7%, the jobless rate climbed to 4.9%. This climb in the jobless rate implies that U.S. economy was not able to absorb the influx of people who joined or rejoined the labor force, which is not a good sign.

Overall, the June NFP report’s only bright spots were the larger-than-expected increase in non-farm employment and the increase in participation. The other details of the jobs report were not too upbeat.

As such, forex traders reacted by first buying up the Greenback on the better-than-expected employment reading before dumping it when they got a better look at the details of the report. The mixed nature of the report and how the Fed would interpret it also apparently made forex traders wary of committing further, so there was little follow-through buying or selling after the initial knee-jerk reaction.

USD Index: 15-Minute Forex Chart

USD Index: 15-Minute Forex Chart

What can we expect this time?

  • Non-farm payrolls: 180K expected vs. 287K previous
  • Jobless rate: expected to tick lower to 4.8% from 4.9%
  • Average hourly earnings m/m: 0.2% expected vs. 0.1% previous

For the July NFP report, most economists expect that non-farm employment will see a net increase of 180K, which is much lower than the previous month’s job gains. The jobless rate, meanwhile, is expected to improve from 4.9% to 4.8%. As for wage growth, it’s expected to accelerate by 0.2%, which is faster than the previous 0.1% increase.

Okay, but what do the available leading indicators have to say?

Well, Markit’s final manufacturing PMI reading for July climbed from a three-month high of 51.3 to an eight-month high of 52.9. Commentary from the report noted that payroll numbers continued to trend higher. Even better, “the rate of job creation picked up to its strongest since July 2015.”

Next up is Markit’s final services PMI reading, which held steady at 51.4 in July. The PMI report notes that jobs growth was sustained. Heck, the rate of job creation even “picked up to its fastest for three months.”

Despite the upbeat PMI reports, Markit Chief Economist Chris Williamson said that “The surveys are broadly consistent with non-farm payrolls rising by 160,000 in July,” which is lower than the 180K consensus.

Let’s move on to the PMI reports from ISM. ISM’s manufacturing PMI reading for July weakened from 53.2 to 52.6. And the employment sub-index weakened as well, sliding from 50.4 to 49.4. This means that employment in the manufacturing sector contracted.

As for ISM’s non-manufacturing PMI, it also weakened from 56.5 to 55.5. And the same can be said for non-manufacturing sector’s employment index, which dropped from 52.7 to 51.4. The reading is still above the 50.0 stagnation level, so payrolls increased, albeit at a slower pace. And of the 62 non-manufacturing industries, 12 reported job gains while 5 reported job losses. The rest reported stagnant job growth. The industries that reported job losses include agriculture, which is not included in non-farm payrolls, as well as warehousing and other relatively lightweight industries. Meanwhile, the industries that reported job gains were labor-intensive ones like retail trade, accommodation, and food services.

Finally, the latest ADP report said that the U.S. economy generated 179K non-farm jobs in July, which is more than the 171K consensus for the ADP report. And while the previous reading was revised higher to 176K, it’s still a farcry from the job gains reported in the June NFP report.

Overall, the available leading indicators are saying that payroll numbers in July still grew, albeit at a weaker pace when compared to June. The consensus reading therefore looks about right. However, probability seems slightly skewed towards a downside surprise, given that Markit is expecting a payroll increase of only 160K. Also, ISM is saying that jobs growth from the manufacturing sector declined while jobs growth from the non-manufacturing sector moderated a bit.

As usual, expect a knee-jerk reaction depending on whether the actual reading for non-farm employment meets, beats, or misses the consensus reading.

For follow-through price action, employment numbers above 100K are usually considered okay because “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month,” according to Fed Head Yellen.

If employment does come in at 100K or better, then forex traders will usually focus on other labor indicators, namely wage growth. And remember, the Fed’s lack of forward guidance during last week’s FOMC statement and the disappointing Q2 GDP growth have recently crushed rate hike expectations and sent the Greenback tumbling against its peers. So if the upcoming NFP report is solid all around, it may just revive rate hike expectations, which may stoke Greenback demand. But on the flip-side, if we get a thoroughly disappointing NFP report, then the Greenback could weaken all the more.

 


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