Greetings, forex friends! It’s the first week of a new trading month, so you know that another U.S. NFP report is coming our way this Friday (August 4, 12:30 pm GMT). So if you need to get up to speed on what happened last time, as well as what’s expected this time, then today’s Event Preview may be just what you need.
What happened last time?
- June non-farm payrolls: 222K vs. 175K to 177K expected
- May non-farm payrolls: upgraded from 138K to 152K (+14K)
- April non-farm payrolls: upgraded from 174K to 207K (+33K)
- June average hourly earnings m/m: 0.2% vs. 0.3% expected
- May average hourly earnings m/m: downgraded from 0.2% to 0.1%
- Jobless rate: 4.4% vs. steady at 4.3% expected
- Labor force participation rate: 62.8% vs 62.7% previous
I noted in my June NFP Event Preview that leading indicators were mixed but more were pointing to a slowdown in job creation. In addition, I pointed out that the probability of getting a surprise reading “appears to be skewed more towards an upside surprise, based on the historical tendencies and the recent string of better-than-expected readings.”
Well, those leading indicators that were pointing to a slowdown in job creation were apparently wrong while the historical tendencies held true since 222K non-farm jobs were created in June, which is significantly more than the expected increase of between 175K to 177K jobs.
Even better, the readings for May and April were revised higher to show that the U.S. economy generated 47K more jobs than originally estimated.
And while the jobless rate deteriorated from 4.3% to 4.4%, it wasn’t too bad since the uptick in the jobless rate was partly due to labor force participation rising from 62.7% to 62.8%.
This put an end to two straight months of falling participation, which may be a sign that the U.S. economy had improved enough that more Americans were encouraged to rejoin the labor force.
So far, so good, right? Unfortunately, wage growth was a disappointment yet again since average hourly earnings only increased by 0.2% month-on-month, which is a tick slower than the expected 0.3% increase.
Also note that the 0.2% reading is actually rounded up. A more precise reading is +0.15%, which is only half of the expected increase in wages, so yeah, it was really disappointing. Worse, the reading for May was downgraded from a 0.2% increase to a measly 0.1% rise.
In summary, non-farm payrolls came in better-than-expected, which is why traders tried to buy up the Greenback as a knee-jerk reaction. However, traders saw that wage growth was a disappointment yet again, so Greenback bears quickly charged in, pushing the Greenback lower.
Overall, the June NFP report was mixed but still somewhat positive, however. Odds for a June rate hike even improved at the time, which is very likely why follow-through buying eventually pushed the Greenback higher after the initial tussle. Greenback bears who were more focused on the poor wage growth weren’t ready to back off, though, and so the Greenback began to slide lower before the trading week came to a close.
What can we expect this time?
- Non-farm payrolls: 180K vs. 222K previous
- Jobless rate: 4.3% expected vs. 4.4% 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. generated around 180K non-farm jobs.
This is less than the +222K increase reported in the previous month, so economists agree that job creation slowed in July.
Even so, the economists forecast that the jobless rate will improve from 4.4% to 4.3%. Average hourly earnings, meanwhile, is expected to grow by +0.3%, which is a tick stronger than the +0.2% increase that was recorded in June.
Moving on to the leading labor indicators, Markit’s final manufacturing PMI jumped from a nine-month low of 52.0 to a four-month high of 53.3. With regard to job creation in the manufacturing sector, commentary from Markit noted that “the latest expansion in staffing levels was the strongest in five months.”
However, anecdotal evidence compiled by ISM contradicts Markit’s findings since ISM’s manufacturing employment index eased from 57.2 to 55.2, which means that employment in the manufacturing sector continued to grow in July, albeit at a slower pace compared to June.
Next, Markit’s flash services PMI was unchanged at 54.2. And commentary from Markit noted that “payroll numbers expanded at a solid pace in July, with the rate of job creation the fastest so far in 2017.”
As for historical tendencies, there’s no clear historical trend when it comes to whether or not economists will undershoot or overshoot their guesstimates for the July reading, based on data from the last 10 years.
However, June’s reading does get an upgrade more often than not.
In addition, seasonal adjustments mean that there’s a historical tendency for the July reading to be weaker compared to the June reading.
In summary, the available leading indicators are pointing to stronger jobs growth in July. However, economists are of the consensus that jobs growth slowed down a bit but remained above the 100K “floor” that’s needed to keep up with working-age population growth.
And historical data supports the consensus view since non-farm payrolls in July is usually weaker compared to June.
And while there is no historical trend when it comes to how economists fare with their guesstimates, probability appears more skewed to the upside. After all, the available leading indicators are pointing to stronger jobs growth in July.
In any case, just remember that a better-than-expected reading for non-farm employment usually triggers a quick Greenback rally.
In contrast, a miss usually causes the Greenback to tank. However, strong selling pressure is unlikely as long as the reading for non-farm payrolls doesn’t go below 100K.
And if the reading is still above 100K, traders will likely switch their focus to the other labor indicators, with wage growth usually in focus. After all, rate hike expectations have suffered recently, partly because of the Fed’s concerns over inflation, particularly the rather subdued inflationary pressure from wage growth.