Hello, forex buddies! Tomorrow (September 1, 12:30 pm GMT) is gonna be another U.S. non-farm payrolls (NFP) Friday, which means that the Greenback will very likely get a volatility infusion. That also means that it’s time for another edition of my classic NFP Event Preview.
What happened last time?
- July non-farm payrolls: 209K vs. 180K expected
- June non-farm payrolls: upgraded from 222K to 231K (+9K)
- May non-farm payrolls: downgraded from 152K to 145K (-7K)
- Average hourly earnings m/m: 0.3% as expected vs. 0.2% previous
- Jobless rate: downtick to 4.3% as expected vs. 4.4% previous
- Labor force participation rate: 62.9% vs 62.8% previous
In my previous NFP Preview, I noted that the available leading indicators at the time were pointing to stronger jobs growth in July.
However, I also pointed out that the consensus was for jobs growth to slow down, which is in-line with historical data, since jobs growth in July has been historically weaker compared to June.
I reconciled these two conflicting data by concluding that jobs growth likely slowed but that probability is likely more skewed towards an upside surprise, given the available leading indicators.
As it turns out, that conclusion was right since the July NFP report printed an upside surprise for jobs growth. To be more specific, the U.S. economy generated 209K non-farm jobs in July, which is more than the 180K consensus.
At the same time, the historical tendency of slower jobs growth in July was affirmed because the 209K increase in July was still weaker compared to the 231K increase in June.
Speaking of jobs growth in June, June’s reading was actually upgraded from +222K to 231K. Unfortunately, the reading for May was revised lower from +152K to +145K. Still, that’s a net gain of 2K jobs, so employment still increased at a slightly faster pace than originally estimated, which is good.
As for the other labor market indicators, the jobless rate improved from 4.4% to 4.3% as expected. And it was a healthy downtick since the labor force participation rate in July actually climbed to a three-month high of 62.9% even as the number of unemployed Americans fell from 601K to 775K.
Average hourly earnings, meanwhile, increased by 0.3% as expected. Although a more precise reading yields +0.34%, so wage growth was actually a bit faster-than-expected.
Overall, the July NFP report was pretty great, which is why Greenback bulls immediately went on the offensive and bid the Greenback higher.
What can we expect this time?
- Non-farm payrolls: 180K vs. 209K previous
- Jobless rate: steadt at 4.3% expected
- Average hourly earnings m/m: 0.2% expected vs. 0.3% previous
For this Friday’s August NFP report, the general consensus among economists is that around 180K non-farm jobs were generated during the August period.
This is smaller increase compared to July’s 209K increase in non-farm jobs, so there’s also a consensus that jobs growth slowed further in August.
The jobless rate, meanwhile, is expected to hold steady 4.3%. As for wage growth, average hourly earnings is expected to grow by 0.2%, which is a slightly weaker increase compared to the 0.3% rise reported during the July period.
Moving on to the leading labor indicators, we are kinda handicapped this time around since the ISM manufacturing PMI report will be released after the NFP report while the ISM non-manufacturing PMI report won’t be released until next week.
We still have Markit’s manufacturing and services PMI reports, though. And unfortunately, Markit’s U.S. manufacturing PMI fell from 53.3 to 52.5. However, commentary from Markit observed that “companies continued to add to their payroll numbers in August, with the rate of job creation unchanged from July’s seven-month record.”
Meanwhile, Markit’s U.S. services PMI jumped from 54.7 to to a 28-month high of 56.9 in August, but Markit’s commentary on jobs growth was not as great since Markit noted that the “rate of payroll expansion was only fractionally below July’s seven-month record.” In other words, jobs growth in the service sector eased a bit. And remember, the service sector accounts for the bulk of U.S. jobs.
Other than Markit’s PMI reports, we also have the latest ADP report, which printed a 237K increase in August, soundly beating the consensus for a 185K rise in private non-farm payrolls. The August reading is even bigger than the previous month’s upwardly revised 201K increase.
Moving along to historical tendencies, economists have a very strong tendency to overshoot their guesstimates for August non-farm payrolls. And as a result, there are far more downside surprises than upside surprises. Heck, just look at the table below.
Another historical tendency is that the reading for August is usually weaker compared to July, which is in-line with consensus.
To summarize, the available leading indicators are mixed. On the one hand, the ADP report is pointing to strong jobs growth in August. On the other hand, Markit is hinting that jobs growth slowed slightly, given that jobs growth in the manufacturing sector maintained its pace while jobs growth in the large service sector eased a bit.
However, Markit’s hints at slower jobs growth are more in-line with the general consensus and the historical tendency that jobs growth in August is usually slower compared to July.
Speaking of historical tendency, there’s a very strong tendency for economists to overshoot their guesstimates, so a downside surprise is more likely.
However, there’s still a chance for an upside surprise, given the strong ADP report, as well as Markit’s finding that jobs growth was robust overall in August, albeit a bit weaker with regard to the service sector.
In any case, just keep in mind that a better-than-expected reading for non-farm payrolls usually unleashes a flurry of Greenback buying as a knee-jerk reaction. And the Greenback’s reaction to the July NFP report is a textbook example of that.
A weaker-than-expected reading, meanwhile, usually triggers a quick Greenback selloff.
Although follow-through selling is usually rare if the reading for non-farm payrolls is still above 100K, which is the minimum number of jobs needed per month to keep up with working-age population growth.
Also, do keep in mind that rate hike expectations are more closely linked to wage growth, so keep an eye on average hourly earnings, since that will likely dictate the Greenback’s price action after the initial knee-jerk reaction.