Employment – the bright spot in the US economy
Interestingly, compared with data disappoints elsewhere in June, employment indicators have held up fairly well. Although the ISM manufacturing index dipped to 49.7 in June, which is in contractionary territory, the employment index only ticked slightly lower to 56.6 from 56.9 in May, which is at the top end of employment readings over the past year. For the past six months the employment sub-index has out-performed the overall ISM manufacturing index, thus we could still see payrolls deliver a positive result for last month even if the manufacturing index is weak.
Job losses in the corporate sector fell in June, according to the Challenger report, which is also included in our prop model, dropping 9.7% on the month. This was the first decline in three months.
The other inputs to our model also suggest that we could see an improvement in the NFP data when it is released tomorrow. The ADP jobs report, which measures job creation in the private sector, also beat expectations and reported the strongest level of job growth since March 2012 at 176k. The ISM non-manufacturing employment index actually improved in June to 52.3 after falling to 50.8 in May.
Can job growth last?
Our model is predicting the strongest growth in Non-Farm Payrolls since February 2012. Employment tends to be a lagging economic indicator, so if the NFP report shows healthy jobs growth in June it may not be a true reflection of economic health and economic data may still decline going forward. Even the Federal Reserve revised lower its growth forecast for 2012 in June to 2.2-2.7% from its prior forecast in April of 2.4- 2.9%.
What does this mean for markets?
The dollar has been performing well in recent days as risk aversion has gripped financial markets. Post the ECB meeting on Thursday, EURUSD tumbled nearly 1.5%, before finding support just ahead of 1.2350. This is the lowest level since early June.
Although 175K is not stellar job growth for an economy like the US, if tomorrow’s NFP number comes in around this level we believe the markets may react positively to it due to the recent weakness in some US economic data releases. It may help to boost the dollar even further and it could also boost stock and commodity markets in the short-term, as investors are cheered by signs of economic health. Due to this, a strong reading tomorrow may cause EURUSD to fall back towards the early June low of 1.2250 in the medium-term.
However, a weak number could fuel expectations of more QE from the Federal Reserve, which tends to be dollar negative. This could cause an immediate knee jerk reaction lower as investors react to further signs of weakness in the US economy. However, ultimately this could be dollar negative, and we may see EURUSD start to recover back towards the 1.25 zone in the coming weeks.
USDJPY is also very sensitive to payrolls data. A 170k reading as we expect, may put to bed expectations of more QE, which may push up Treasury yields. Treasuries and USDJPY tend to have a strong positive relationship, so when Treasury yields rise we may see a corresponding rise in USDJPY. This cross is already above the daily Ichimoku cloud at 79.50, a strong payrolls figure could see this pair move towards the top of the cloud at 81.15 in the medium-term. A weak number could cause it fall back towards 79.10/15 in the coming weeks.