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Hello, forex friends! Tomorrow (September 2, 12:30 pm GMT) is gonna be another non-farm payroll (NFP) Friday, so get ready because the Greenback will very likely get a volatility infusion.

Aside from the NFP report’s inherent importance, forex traders also have their sights particularly on the upcoming NFP report because Fed Head Janet Yellen said in her Jackson Hole speech that “the case for an increase in the federal funds rate has strengthened in recent months,” partly due to the strong employment numbers in the past couple of months and expectations of “additional strengthening in the labor market.

And as Fed Vice Chairman Stanley Fischer said in a later interview, Yellen’s statements were “consistent” with a possible September rate hike, as well as the possibility of at least two rate hikes within the year.

There’s therefore a lot riding on the upcoming NFP report with regard to rate hike expectations. Having said that…

What happened last time?

  • July non-farm payrolls: 255K vs. 180K expected
  • June non-farm payrolls: revised higher from 287K to 292K
  • May non-farm payrolls: revised higher from 11K to 24K
  • Average hourly earnings m/m: 0.3% vs. 0.2% expected, 0.1% previous
  • Jobless rate: steady at 4.9% vs. tick lower to 4.8% expected
  • Labor force participation rate: ticked higher from 62.7% to 62.8%

I commented in my Forex Preview for the July NFP report that “the available leading indicators are saying that payroll numbers in July still grew, albeit at a weaker pace when compared to June.” I, therefore, concluded that “probability seems slightly skewed towards a downside surprise.”

Well, we did get a downside surprise, but only for the unadjusted reading (-1,030K). For the seasonally-adjusted reading, however, we got a nice upside surprise (+255K vs. +180K expected).

Even better, the readings for June and May were also revised higher. And the good news doesn’t end there since average hourly earnings increased by 0.3%, which is a faster pace of increase than the previous month’s 0.1%, as well as the consensus reading of +0.2%.

The only dark spot was the jobless rate holding steady at 4.9%, missing expectations that it would tick lower to 4.8%. However, looking at the details of the NFP report reveals that the labor force participation rate ticked higher from 62.7% to 62.8%. At the same time, the number of unemployed people decreased from 7,783K to 7,770K.

The fact that the jobless rate held steady therefore means that the U.S. economy was able to absorb the influx of people who joined or rejoined the labor force, which is a very good thing.

Overall, the July NFP report was pretty good all around, which is why the Greenback skyrocketed pretty much across the board.

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

What can we expect this time?

  • Non-farm payrolls: 180K expected vs. 255K previous
  • Jobless rate: expected to tick lower to 4.8% from 4.9%
  • Average hourly earnings m/m: 0.2% expected vs. 0.3% previous

For the employment situation in August, the general consensus among economists is that the U.S. economy will generate a net increase of 180K non-farm jobs.

Meanwhile, the jobless rate is expected to improve from 4.9% to 4.8%, but wage growth is expected to grow by 0.2% month-on-month, which is slower than July’s +0.3% pace.

We’ve got fewer leading labor indicators this time since ISM’s manufacturing PMI report won’t be released until later while ISM’s non-manufacturing PMI won’t be released until next week.

Anyhow, Markit’s flash manufacturing PMI reading for August slid lower from an eight-month high of 52.9 to 52.1 52.9. Regarding employment, commentary from the PMI report noted that “Manufacturing employment increased only slightly during August. Furthermore, it was the weakest rate of payroll growth seen for four months.”

Next, Markit’s flash services PMI reading tumbled from 51.4 to 50.9 in August. And according to commentary from the report, payroll numbers rose “at the least marked rate since December 2014” since “subdued demand conditions and the need to cut costs had led to more cautious staff hiring plans and the non-replacement of leavers.” Markit’s Chief Business Economist, Chris Williamson, further added that “the August PMI is consistent with non-farm payrolls rising by just under 130,000.”

Finally, the employment reading from the ADP report came in at 177K, which is lower than the previous month’s upwardly revised 194K reading.

Overall, the available leading indicators seem to be pointing to weaker job creation during the August period. The consensus reading, therefore, seems about right, although chance seems to be skewed more towards a possible downside surprise.

Also, do note that payroll numbers for the August period tend to be lower due to seasonal adjustments.

August NFP: Unadjusted vs. Adjusted

Moreover, the actual seasonally-adjusted reading tends to miss expectations.

August NFP: Expected vs. Actual

But as usual, expect a quick rally if the actual reading for non-farm employment beats expectations. On the flip side, a quick selloff is usually triggered when the actual reading misses expectations.

Also note that according to Atlanta Fed President Dennis Lockhart, non-farm employment of around 150K would be “very encouraging.” But an actual reading above 100K would probably be good enough. After all, “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.

So if the actual reading does come in at 100K or better, forex traders will likely turn their attention to the other labor indicators for follow-through buying or selling, with wage growth being the most likely focus.