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Hello, forex friends! We’ve got another NFP Friday coming up (July 8, 12:30 pm GMT), so chances are good that the Greenback’s gonna get a volatility infusion.

And if you’re planning to trade this top-tier event, and you need to get up to speed on what happened last time and what leading indicators are saying, then this Forex Preview for the NFP report may just what you need.

Update [June 7, 4 pm GMT]: Took ADP report and the ISM non-manufacturing PMI report into account. Also revised conclusion from a possible downside surprise to a possible upside surprise.

What happened last time?

  • Average hourly earnings m/m: 0.2% as expected vs. 0.3% previous
  • Average hourly earnings y/y: steady at 2.5%
  • May non-farm payrolls: 38K vs. 163K expected, 123K previous
  • April non-farm payrolls: downgraded to 123K vs. 160k originally
  • March non-farm payrolls: downgraded to 186K vs. 208K originally
  • Jobless rate: dropped to 4.7% vs. 4.9% expected, 5.0% previous
  • Labor force participation rate: dropped from 62.8% to 62.6%

In my Forex Preview for the May NFP report, I ended my write-up by saying that “chances are skewed slightly towards a downside surprise.” I was therefore expecting a weaker increase in non-farm payrolls, contrary to the general consensus that it was gonna increase at a faster pace compared to last time.

Nonetheless, the actual reading still surprised me since it came in at a measly 38K, which also happens to be the weakest net increase since September 2010.

To make matters worse, the reading for April was downgraded from 160K to 123K while the reading for March was downgraded from 208K to 186K. And that’s not the end of it since the labor force participation rate also slid to a six-month low of 62.6% from 62.8% previously.

The drop in participation rate was due to 664K workers dropping out of the labor force, which was more than enough to pump up the number of working-age people not in the labor force to 94,708K, which is a record high.

The jobless rate did drop from 4.9% to 4.7%, which is the lowest reading since late 2007, but this was due to the drop in participation rate, so it’s not really all that good. Anyhow, the only bright spot on the NFP report was that wages grew at the expected pace of 0.2%, so wages continue to grow at a slightly subdued yet steady pace.

Overall, the May NFP report was really bad on the surface, and digging deeper into the details didn’t really offer any salvation, so it’s quite natural that forex traders dumped the Greenback very hard, as you can see on the chart below.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

What do forex analysts expect?

  • Non-farm payrolls: 175K expected vs. 38K previous
  • Jobless rate: expected to tick higher to 4.8% from 4.7%
  • Average hourly earnings: 0.2% expected, same as previous

For the June NFP report, the general consensus is that non-farm employment will see a net increase of 175K after the previous month’s disappointing 38K increase, although the jobless rate is expected to tick higher from 4.7% to 4.8%. Wages, meanwhile, are expected to grow by 0.2%, which is the same rate of increase as last time. But what do the available labor indicators have to say?

First up is Markit’s final manufacturing PMI reading for June, and it climbed to a three-month high of 51.3 from the previous month’s reading of 50.7. Commentary from the report noted that hiring remains subdued, but there was an upturn in employment since “employment growth picked up further from the near three-year low recorded in April.”

Next, Markit’s final services PMI reading was revised higher to 51.4, which means that the PMI reading for June ticked higher from May’s 51.3 reading. Job growth in the service sector was still rather disappointing, however, since it grew at the weakest pace in 17 months.

This is bad because the service sector is the main job provider. Still, Markit’s Chief Economist Chris Williamson commented that the manufacturing and services PMI reports combined imply an employment growth of 150,000 in June, which is an improvement over the previous NFP reading but still below the consensus reading.

Moving on, we have ISM’s manufacturing PMI reading for June and it advanced from 51.3 to 53.2. And the employment sub-index advanced with it, increasing from 49.2 to 50.4, which means that employment in the manufacturing sector finally saw an increase in employment after six consecutive months of contractions.

The increase was not broad-based, however, since only seven of the 18 manufacturing sub-sectors reported a net increase in hiring while six reported job losses.

As for ISM’s non-manufacturing PMI, it came in at 56.5, beating expectations that it would come in at 53.3, as well as the previous 52.9 reading. The employment index also jumped from 49.7 to 52.7, which means that payrolls increased.

The increase is not broad-based, however, since only 12 out of 62 industries reported higher employment levels while two industries reported lower employment levels, with the rest saying that employment levels were stagnant.

The industries that reported a decrease in payroll numbers are Educational Services and Other Services, which are both lightweights when it comes to job creation. The industries that reported an increase in employment levels, meanwhile, include labor-intensive industries like Health Care & Social Assistance, Retail Trade, Accommodation & Food Services, and Construction.

Finally, the ADP report showed a 172K increase in jobs, which is better than last month’s downwardly revised 168K reading. Yep, ADP’s reading for May came in at 168K, a far cry from the 38K reading for the NFP report.

It also contradicts both Markit and ISM since the ADP report noted that manufacturing shed 21K jobs in June. The ADP report did seem to agree with ISM on the service sector since the ADP report, er, reported an increase of 208K jobs from the services-producing sector (175K previous).

Overall, the available leading indicators are pointing to a higher probability that net contribution from the manufacturing sector will increase, but net job gains from the service sector are not as clear since Markit is saying that it continued to weaken while ISM is saying that there were improvements. ISM is also saying that labor-intensive industries were the ones that saw improvements, so the available labor indicators seem to be skewed towards the possibility of an upside surprise.

Do note that one of the reasons why net job gains during the May period were so low was the massive Verizon strike that involved around 35K workers.

Since those people were on strike, they were not on company payrolls and were therefore not considered employed.

And since Verizon and the Unions representing the workers already worked out a deal, the return of those workers would likely bump up the upcoming reading, which means that even if the upcoming NFP report disappoints, the actual reading will still likely be better when compared to the previous month’s reading unless something is really really wrong in the U.S. labor market.

Also, 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.

As to what’s up with that 100K figure, “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 in her December speech. Basically, numbers above 100K are still considered relatively healthy in the eyes of the Fed, which naturally fuels rate hike expectations as well.