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

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Hello, forex friends! Another NFP report is coming our way this Friday (June 2, 12:30 pm GMT), so the Greenback will likely get a volatility infusion.

And if you’re planning trade this top-tier event, then buckle up and read up on today’s Forex Preview.

What happened last time?

  • April non-farm payrolls: 211K vs. 190K expected
  • March non-farm payrolls: downgraded from 98K to 79K (-19K)
  • February non-farm payrolls: upgraded from 219K to 232K (+13K)
  • April average hourly earnings m/m: 0.3% as expected
  • March average hourly earnings m/m: downgraded from 0.2% to 0.1%
  • Jobless rate: 4.4% vs. 4.6% expected, 4.5% previous
  • Labor force participation rate: ticked lower from 63.0% to 62.9%

I noted in my Forex Preview for the April NFP report that leading indicators were mixed but that they seem to be hinting that jobs growth in the service sector slowed down. And since the service sector is the main generator of jobs, then the leading indicators were, in effect, hinting at a slower pace of jobs growth in April.

However, I also pointed out that there’s a historical tendency for jobs growth in April to be a bit faster than in March. Moreover, there have historically been slightly more upside surprises in April.

As it turns out, the April NFP report showed that jobs growth did pick up in April while printing an upside surprise since non-farm employment increased by 211K, which is better than the consensus reading of +190K.

April NFP Report: Expected vs. Actual

Everything wasn’t awesome, though, since the reading for non-farm employment in March was downgraded from a poor 98K to a dismally poor 79K. The reading for February was upgraded from 219K to 232K, though. Even so, those revisions meant that there were 6K less jobs originally estimated.

Looking at the other details of the NFP report, the jobless rate improved from 4.5% to 4.4% instead of deteriorating to 4.6% as expected. However, the dip in the jobless rate was not a very healthy one since the dip in the jobless rate was partly due to the labor force participation rate also dipping from 63.0% to 62.9%. This means that some Americans got discouraged and left the labor force since the number of American not in the labor force rose from 94.21 million to 94.38 million.

As for wage growth, it met expectations for a 0.3% increase in April. However, the reading for March was downgraded from +0.2% to +0.1%.

Overall, the April NFP report painted a rather mixed picture since jobs growth exceeded expectations but the previous reading got downgraded. Meanwhile, the jobless rate improved partly because of a lower participation rate. And while wage growth met expectations, the previous reading got revised lower.

Anyhow, the better-than-expected reading for payroll numbers caused the Greenback to initially jump higher. But the disappointing details, especially the downgrade on wage growth, would later cause the Greenback to give back its gains (and then some).

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

What can we expect this time?

  • Non-farm payrolls: 180K – 186K expected vs. 211K previous
  • Jobless rate: steady at 4.4% expected
  • Average hourly earnings m/m: 0.2% expected vs. 0.3% previous

For the employment situation during the month of May, the general consensus is that the U.S. generated between 180K to 186K non-farm jobs. This is obviously less than the 211K non-farm jobs generated in April.

The jobless rate, meanwhile, is expected to hold steady at 4.4%. As for average hourly earnings, that is expected to print a 0.2% month-on-month increase, which is a smaller increase compared to the 0.3% reported in April.

Looking at our available leading labor indicators, Markit’s final manufacturing PMI reading for the month of May came in at 52.7, which is better than the initial reading of 52.5, but still a tick lower than the previous month’s 52.8, as well as an eight-month low to boot.

Moreover, This marks the fourth consecutive month of ever weaker readings. And with regard to payroll numbers in the manufacturing sector, Markit noted that employment “grew at only modest rates as sluggish sales prompted firms to scale back hiring.”

As for Markit’s flash services PMI reading, it jumped from 53.1 to a four-month high of 54.0. The better conditions in the service sector also caused job creation to increas “at an accelerated pace in May, following the near-seven year low recorded during April.”

Additional commentary from Markit noted that “The survey is indicative of non-farm payroll growth of approximately 160,000.”

Next, ISM’s manufacturing PMI reading ticked higher from 54.8 to 54.9 in May. Not to worry, though, since ISM’s employment index jumped by 1.5 points to 53.5, so ISM is saying that payroll numbers grew at a faster pace, which contradicts Markit’s findings that jobs growth in the manufacturing sector was only modest.

Finally, the ADP report, er, reported that private sector non-farm payrolls increased by 253K in May, which is much better than the expected 181K. However, the previous reading was downgraded from 177K to 174K.

Looking at the details of the ADP report, the large increase in private non-farm payrolls was due to a large increase in service sector and construction jobs, which were able to offset the weaker growth of manufacturing jobs, so the ADP report appears to side with Markit, at least when it comes to jobs growth in the manufacturing sector.

Moving on to historical trends (with 2007 as the starting point), economists tend to undershoot their guesstimates for payroll numbers during the May period. As a result, there are more upside surprises than downside surprises.

May NFP Report: Expected vs. Actual

And it may just be a coincidence, but there’s a three-year pattern of upside surprises, followed by downside surprises, followed by another set of upside surprises. And last year, we got the first downside surprise. It remains to be seen if this pattern will hold, though.

Also, do note that there’s a historical tendency for the April reading to get downgraded, as you can see below.

April NFP Report: Revisions

In summary, the available economic reports are mixed once again, but they seem to point to a pick up in service sector jobs growth. And as mentioned earlier, the service sector is the main generator of jobs, so faster jobs growth in the service generally translates to faster overall jobs growth. However, that is contrary to the consensus for a slower pace of jobs growth.

As for the probability of getting a surprise reading, that appears to be skewed slightly towards an upside surprise, based on the historical tendencies. And if the leading labor indicators are right, there’s even a possibility that the actual reading may be better than the previous reading.

Anyhow, just remember that an upside surprise for non-farm payrolls usually causes the Greenback to jump higher as a knee-jerk reaction. A good example is how the Greenback reacted last time around. On the flip side, the Greenback usually gets dumped when the reading for non-farm payrolls is below consensus. For follow-through buying or selling, that usually depends on the other details of the NFP report.

And as usual, just remember that a reading for non-farm payrolls above 100K is generally considered a good number (even if it’s a miss) since that’s the magic number of jobs per month needed to keep up with working-age population growth, according to Fed Head Yellen herself. As such, rate hike odds and the Greenback will likely remain resilient if the actual reading is above 100K. Of course, that also depends on other labor indicators, with wage growth usually in focus.

About Forex Gump
I throw macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully, the final product are lessons about the FX market that's easy to understand.

Success is a journey, not a destination.Ben Sweetland