Greetings, forex friends! It’s the first Friday of a new trading month, which means another U.S. NFP report is coming our way this Friday at 12:30 pm GMT. That also means that it’s time for another edition of my Event Preview, so gear up for that top-tier event by reading up on today’s write-up.
What happened last time?
- June non-farm payrolls: +213K vs. +195K expected
- May non-farm payrolls: upgraded from +223K to +244K
- April non-farm payrolls: upgraded from +159K to +175K
- Jobless rate: 4.0% vs. steady at 3.8% expected
- Average hourly earnings m/m: 0.2% vs. 0.3% expected, same as previous
- Labor force participation rate: 62.9% vs. 62.7% previous
I noted in my June NFP Event Preview that the available leading labor indicators and historical tendencies seem to support the consensus view that jobs growth slowed in June.
However, I also stressed that the historical tendencies have failed to hold in recent years since there are more upside surprises in the last five years.
As for wage growth, I pointed out back then that there’s a clear historical tendency for wage growth to slow in June and that economists tend to overshoot their guesstimates to boot, which skews probability more towards a downside surprise.
Well, we did get an upside surprise for jobs growth since the June NFP report revealed that non-farm jobs increased by 213K (+195K expected).
Even better, the reading for May was upgraded upgraded from +223K to +244K, while the reading for April was revised higher from +159K to +175K. That’s 37K more jobs than originally estimated!
Despite the stronger jobs growth, the jobless rate deteriorated from 3.8% to 4.0%. But on a happier note, the higher jobless rate was due to the labor force participation rate jumping from 62.7% to a three-month high of 62.9%, which is a promising sign for the U.S. economy.
Sadly, historical tendencies for wage growth held since average hourly earnings only increased by 0.2% month-on-month, missing expectations for a 0.3% rise.
Other than the miss in wage growth, the June jobs report was actually pretty good overall.
However, traders were apparently more focused on wage growth since the Greenback weakened pretty much across the board when the NFP report was released.
And as I warned in my Event Preview, and as pointed out by Pip Diddy in his weekly USD recap, the Greenback was also taking a beating at the time because Trump fired the opening salvo of the Sino-US trade less than a day before the NFP report was released.
What can we expect this time?
- Non-farm payrolls: +190K expected vs. +213K previous
- Jobless rate: 3.9% expected vs. 4.0% previous
- Average hourly earnings m/m: 0.3% expected vs. 0.2% previous
For the employment situation in July, most economists economists forecast that the U.S. economy generated around 190K non-farm jobs, which is a weaker increase compared to June’s +213K.
Even so, economists think that the increase in jobs will be enough to lower the jobless rate from 4.0% to 3.9%.
As for wage growth, the consensus is that wage growth accelerated since average hourly earnings are expected to print a 0.3% month-on-month increase (+0.2% previous).
So, what do the leading labor indicators have to say?
- Markit’s manufacturing PMI report found that “the rate of job creation [softened] despite increased pressure on production capacities.”
- ISM’s manufacturing PMI report conflicts with Markit’s findings since the employment sub-index improved slightly from 56.0 to 56.5, which means that employment grew at a slightly faster pace.
- Markit’s service PMI report, meanwhile, cautioned that “the latest upturn in employment numbers the weakest since January.”
- The ADP report showed that private non-farm jobs increased by 219K, beating forecasts for a 186K increase. And the details showed that both the manufacturing and service sectors printed stronger jobs growth.
What about historical tendencies? Do they offer additional insights?
Well, seasonal adjustments mean that there’s a historical tendency for the July reading to be weaker compared to the June reading, which supports the consensus view.
Also, June’s reading gets an upgrade more often than not.
But when it comes to whether or not economists will undershoot or overshoot their guesstimates for the July reading, there are no clear historical tendencies for us to exploit. There are slightly more upside surprises, though.
As for wage growth, the consensus that wage growth picked up the pace does seem to have a historical basis.
Unfortunately, economists have had a mixed record when it comes to their guesstimates.
To summarize, the available leading labor indicators are mixed since Markit is pointing to a slowdown but the ADP report printed a stronger-than-expected reading for private non-farm jobs. ISM, meanwhile, is presenting an incomplete picture since ISM’s non-manufacturing PMI report won’t be released until after the NFP report is out.
Historical tendencies support the consensus view that jobs growth slowed in June while wage growth accelerated.
However, there are no clear historical trends to exploit when it comes to how economists fared with their guesstimates for both jobs growth and wage growth.
In any case, just remember that a better-than-expected reading for non-farm employment usually (but not always) triggers a quick Greenback rally. In contrast, a miss usually causes the Greenback to weaken. The Greenback’s bearish reaction last month was more of an outlier.
As for follow-through buying or selling, that usually depends on the other labor indicators, with wage growth usually in focus.
Also, do note that trade war rhetoric has resurfaced recently, so keep an eye and ear out for trade-related news.
Anyhow, if news trading ain’t your thing or if high volatility makes you uncomfortable, then remember that you always have the option to sit on the sidelines and wait for things to settle down.