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Hello, forex friends! Canada’s not the only one that’s scheduled to release its jobs report this Friday since we’ve also got the U.S. NFP report coming up.

There’s therefore a very good chance that the Greenback will get a volatility infusion this Friday.

What happened last time?

  • May non-farm payrolls: 138K vs. 180K expected
  • April non-farm payrolls: downgraded from 211K to 174K (-37K)
  • March non-farm payrolls: downgraded from 79K to 50K (-29K)
  • May average hourly earnings m/m: 0.2% as expected
  • May average hourly earnings y/y: 2.5%, same as previous
  • April average hourly earnings m/m: downgraded from 0.3% to 0.2%
  • Jobless rate: 4.3% vs. steady at 4.4% expected
  • Labor force participation rate: 62.7% vs 62.9% previous

I noted in my previous NFP Event Preview that leading indicators were pointing to a possible pickup in jobs growth since job creation in the service sector accelerated. After all, the service sector is the main generator of jobs in the U.S. economy.

I also noted that economists have a historical tendency to undershoot their guesstimates, resulting in more upside surprises.

Although I also pointed to a weird, alternating, three-year pattern of upside surprises followed by downside surprises.

As it turns out, the leading indicators were wrong and the historical tendency failed to hold.

The three-year pattern did, however, (although that may just be a coincidence) since the U.S. economy only generated 138K jobs in May, which is way below consensus that between 180K to 186K jobs were created.

The disappointment doesn’t stop there since the reading for April was downgraded from +211K to +174K while the reading for March was revised lower from +79K to +50K. That’s a loss of 66K jobs from all those revisions!

On a more upbeat note, the jobless rate ticked lower from 4.4% to 4.3%, which is the lowest since May 2001.

But on a more downbeat note, the lower jobless rate was partially due to the participation rate deteriorating from 62.9% to a five-month low of 62.7%, which is a bad sign for the U.S. economy.

As for wage growth, average hourly earnings rose by 0.2% month-on-month between April and May, which is within expectations. Unfortunately, the previous reading got downgraded from +0.3% to +0.2%

Overall, the May NFP report was pretty bad. It’s therefore not very surprising that the market reacted by dumping the Greenback pretty hard.

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


What can we expect this time?

  • Non-farm payrolls: 175K to 177K expected vs. 138K previous
  • Jobless rate: steady at 4.3% expected
  • Average hourly earnings m/m: 0.3% expected vs. 0.2% previous

The general consensus among economists is that between 175K to 177K non-farm jobs were generated in the month of June, which means that economists are expecting job creation to accelerate compared to May.

As for the other labor indicators, the jobless rate is expected to hold steady at 4.3% while average hourly earnings are expected to print a 0.3% month-on-month increase, which is a tick faster compared to May.

Moving on to the leading labor indicators, Markit’s final manufacturing PMI eased from 52.7 to a nine-month low of 52.0 in June. And commentary from Markit on employment noted that “the pace of job creation eased to its lowest since March.”

ISM’s manufactuing PMI report contradicts Markit’s findings since ISM’s employment index jumped from 53.5 to 57.2, which means that employment in the manufacturing sector grew at a faster rate in June compared to May.

Next, Markit’s final services PMI improved from 53.6 to a five-month high of 54.2 in June. More importantly, the “pace of job creation was the quickest since February, with anecdotal evidence suggesting that additional workers were hired due to increased operating capacity requirements.”

However, ISM’s non-manufacturing PMI report contradicts this. Sure, the headline reading improved from 56.9 to 57.4. However, the employment index slumped from 57.8 to 55.8, which means that employment still grew in June, albeit at a slower pace compared to May.

Finally, the June ADP report was a disappointment because it only printed a 158K increase in private non-farm jobs, which is below the +184K consensus. In addition, the previous reading was reduced from a net gain of 253K jobs to 230K jobs.

And looking at the details, the ADP report showed that manufacturing jobs contributed a big, fat zero to private jobs growth, which goes against both Markit and ISM, at least with regard to companies in the private sector that use ADP’s services.

Moving on to historical trends, economists tend to undershoot their guesstimates for June, so there are more upside surprises.

Furthermore, economists have been undershooting their guesstimates for the past four years.

There’s no guarantee that this historical tendency will hold, though, since economists have been overshooting their forecasts for five consecutive years before that.

In summary, the available economic reports are painting a mixed picture once again, with conflicting finding from Markit and ISM. But using the ADP report a tie-breaker, then leading indicators are pointing to the likelihood that job creation slowed in June, which is contrary to the consensus that job creation accelerated.

As for the probability of getting a surprise reading, that appears to be skewed more towards an upside surprise, based on the historical tendencies and the recent string of better-than-expected readings. However, there’s no guarantee on that.

Having said that, just keep in mind that forex traders usually have their sights on non-farm payrolls. And if non-farm payrolls print an upside surprise, then the Greenback usually jumps higher as a knee-jerk reaction.

But if non-farm payrolls disappoint, then the Greenback usually gets dumped. And last month’s reaction to the May NFP report is a classic example.

For follow-through buying or selling, that usually depends on the other details of the NFP report, with wage growth usually in focus.