Since the 2012 low print of 68K non-farm payrolls added in April, jobs growth has slowly picked up (+77K in May, +80K in June). This has not been sufficient to lower the unemployment rate which ticked higher to 8.2% in May. Furthermore, 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 keeping a close eye on employment data, 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.
Recent employment data has been relatively mixed – ADP (Automatic Data Processing) payrolls fell by 9K from the prior month however the 163K print was better than expectations for a 120K reading and weekly initial jobless claims have been choppy of late, however the 4-week moving average (a smoothed measure) has declined in all of the reported weeks in July. The employment component of the ISM (Institute for Supply Management) manufacturing survey fell to its lowest level since December 2009, but we would note that manufacturing contributes only a fraction to the overall labor market (manufacturing payrolls are forecast to add 10K jobs to the overall July reading). A usual input to our model, the ISM services employment component, will not be released until tomorrow after the Bureau of Labor Statistics (BLS) employment report and therefore was excluded from our calculations this month.
Our regression model indicates an above consensus print with a headline NFP number of +129K jobs. A 129K print is still relatively weak in the broader context and though it may be met with a positive reaction, it would not remove the option of more accommodation. A strong print 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 the labor market would strengthen the case for the Fed action. With the Fed inching 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. A convincing break above the 1.582% level in 10-year Treasury yields would suggest upside potential as this is currently where the 55-day Simple Moving Average (SMA) and medium-term channel top converge. If the employment figures fail to inspire markets to reduce Fed easing expectations, we may see yields continue lower. USD/JPY has been consolidating towards the base of its weekly ichimoku cloud which is currently around the 77.30 level. Ahead of this are the June 1 lows of 77.65/70 which may provide short-term support. To the upside, the 55- and 200-day SMA’s converge around 79.15 which should provide technical resistance. There may be an opportunity to buy dips in USD/JPY if the employment report surprises to the upside and while the weekly cloud base holds as support with a target ahead of the 200-day SMA. A sustained break below the base of the cloud would negate our near term bullish view.
Exhibit 1: Our model forecasts a July NFP print of 129K