Overall, August employment indicators have been relatively strong – ADP (Automatic Data Processing) payrolls unexpectedly jumped to 201K from an upwardly revised 173K in the previous month which was well above the market consensus of 140K. ISM (Institute for Supply Management) employment readings were mixed, however we place more emphasis on the non-manufacturing survey as the service sector is a much larger portion of the US economy. The ISM services employment component climbed back into expansionary territory (above the 50 threshold) with a reading of 53.8 in August from the prior month’s 49.3 which indicated contraction. On the other hand, the ISM manufacturing employment component fell to 51.6 in August from 52.0, however employment in the manufacturing sector makes up only a fraction of those employed in services. Weekly initial jobless claims have been edging higher with the 4-week moving average rising in three out of the past four weeks.
Another indicator which has a close relationship to employment in the US is auto sales. Americans buy cars when they have jobs and employers purchase vehicles when they believe business and hiring will ramp up. Total annualized auto sales reported for August rose to 14.46 million – the highest level in three years, since the “Cash for Clunkers” program in August of 2009.
Source: Bloomberg, Forex.com
The Federal Reserve has expressed its frustration with the pace of jobs growth and has indicated its willingness to provide additional accommodation to promote a “sustained improvement in labor market conditions”. With the Fed inching closer towards providing more stimulus as indicated by recent FOMC minutes and Fed Chairman Ben Bernanke at last week’s Jackson Hole speech, tomorrow’s labor report has the potential to significantly impact markets in the event of a large surprise. Fed policy expectations have been closely tied to domestic data releases of late and as such the USD remains sensitive to surprises in fundamental reports, employment reports in particular.
Our regression model indicates an above consensus print with a headline NFP number of +200K jobs. This model estimate has a standard error of roughly 91K. A strong print such as what our model suggests is likely to reduce market expectations of another round of asset purchases by the Fed (QE3) potentially resulting in modest USD gains while a weaker number (i.e. sub 100K) is likely to weigh on the US dollar as continued softness in the labor market would strengthen the case for the Fed action. With the Fed moving closer towards providing additional measures, expectations of QE3 prospects is likely to drive price action across markets.
Market Strategy: We continue to look to USD/JPY to respond to tomorrow’s release as it has had a strong relation to US Treasury yields and tends to move in the direction of the surprise in the NFP figures. In the event of a positive surprise in the NFP, we would look for the yields and the USD/JPY to move higher with the 10-year Treasury yield potentially rising back towards the 200-day simple moving average (SMA) which is currently around 1.84%. If the employment figures fail to inspire markets to reduce Fed easing expectations, we may see yields head lower, putting pressure on USD/JPY. USD/JPY remains below its weekly ichimoku cloud and is currently testing the convergence of its weekly Tenkan line and 55-day SMA which is ahead of the 79.00 figure. A break above here is likely to see a move towards the base of the cloud which is around the psychological 80.00 figure. There may be an opportunity to see dips in USD/JPY if the employment report surprises to the upside and while trend line support holds around the 78.20 area. A sustained break below the 78.00 figure or break below the June 1 lows of around 77.65/70 would negate our near term bullish view.
Source: Bloomberg, FOREX.com
Another indicator which has a close relationship to employment in the US is auto sales. Americans buy cars when they have jobs and employers purchase vehicles when they believe business and hiring will ramp up. Total annualized auto sales reported for August rose to 14.46 million – the highest level in three years, since the “Cash for Clunkers” program in August of 2009.
Exhibit 1: US total auto sales (annualized) reached 3-year highs in August
Source: Bloomberg, Forex.com
The Federal Reserve has expressed its frustration with the pace of jobs growth and has indicated its willingness to provide additional accommodation to promote a “sustained improvement in labor market conditions”. With the Fed inching closer towards providing more stimulus as indicated by recent FOMC minutes and Fed Chairman Ben Bernanke at last week’s Jackson Hole speech, tomorrow’s labor report has the potential to significantly impact markets in the event of a large surprise. Fed policy expectations have been closely tied to domestic data releases of late and as such the USD remains sensitive to surprises in fundamental reports, employment reports in particular.
Our regression model indicates an above consensus print with a headline NFP number of +200K jobs. This model estimate has a standard error of roughly 91K. A strong print such as what our model suggests is likely to reduce market expectations of another round of asset purchases by the Fed (QE3) potentially resulting in modest USD gains while a weaker number (i.e. sub 100K) is likely to weigh on the US dollar as continued softness in the labor market would strengthen the case for the Fed action. With the Fed moving closer towards providing additional measures, expectations of QE3 prospects is likely to drive price action across markets.
Market Strategy: We continue to look to USD/JPY to respond to tomorrow’s release as it has had a strong relation to US Treasury yields and tends to move in the direction of the surprise in the NFP figures. In the event of a positive surprise in the NFP, we would look for the yields and the USD/JPY to move higher with the 10-year Treasury yield potentially rising back towards the 200-day simple moving average (SMA) which is currently around 1.84%. If the employment figures fail to inspire markets to reduce Fed easing expectations, we may see yields head lower, putting pressure on USD/JPY. USD/JPY remains below its weekly ichimoku cloud and is currently testing the convergence of its weekly Tenkan line and 55-day SMA which is ahead of the 79.00 figure. A break above here is likely to see a move towards the base of the cloud which is around the psychological 80.00 figure. There may be an opportunity to see dips in USD/JPY if the employment report surprises to the upside and while trend line support holds around the 78.20 area. A sustained break below the 78.00 figure or break below the June 1 lows of around 77.65/70 would negate our near term bullish view.
Exhibit 2: Our model forecasts an August headline NFP print of 200K
Source: Bloomberg, FOREX.com
