Dollar rallies ahead of NFP: Will jobs report beat?

The rally in stocks, rise Treasury yields and demand for U.S. dollars tell us that investors anticipate a strong non-farm payrolls report on Friday. The consensus forecast is 870K jobs which would be strongest increase since August and the whisper number is a million. On Wednesday, investors were caught off guard by the weak ADP private payroll number but since then their worries have been eased by other data sets. This morning for example we learned that jobless claims fell to a 3 week low as continuing claims dropped to pre-pandemic lows. July was a strong month for the U.S. economy with increased spending on leisure activities like travel and restaurants.  With businesses across the nation hiring, the jobs report should be good. 
 
Every month we also track a few economic reports that can have strong predictive capabilities for non-farm payrolls and nearly all point to a stronger jobs report in July compared to June.  Service sector ISM hit a record high with the employment component returning to expansion. Challenger reported the fewest job cuts in 21 years, consumer confidence hit a pandemic high according to Conference Board, with jobless claims and continuing claims moving lower. The only outlier was ADP, but this index has deviated from NFPs more than usual in recent months. The sluggish increase can also be a reflection of labor shortage in the private sector.  
 
Arguments for Stronger Non-Farm Payrolls

• ISM Non-Manufacturing Jobs Index Rises to 53.8 from 49.3
• ISM Manufacturing Jobs Index Rises to 52.9 from 49.9
• Challenger Job Cuts Drop to 21 Year Low
• University of Michigan Consumer Sentiment Index Rises to 85.5
• Conference Board Consumer Confidence Index Hits Pandemic High
• Jobless Claims 4 Week Average Falls Slightly to 394.5K from 397K
• Continuing Claims Falls to Pre-Pandemic Lows

 
Arguments for Weaker Non-Farm Payrolls
 

• ADP Drops to 330K from 680K

 
If non-farm payrolls exceeds last month’s 850K increase and the unemployment drops from 5.9% as expected and earnings growth hold steady or rises, USD/JPY will hit 110 and EUR/USD will drop below 1.18. The larger the increase, the stronger the move for the dollar. If payrolls rise by less than 800K and the unemployment rate or earnings growth falls short as well, we expect a modest sell-off in the dollar. A steep decline would happen if job growth is less than 600K. 
 
Canada also releases labor market numbers on Friday. Following strong trade data and a recent increase in IVEY PMI, economists are calling for another month of strong job growth. Canada finally added jobs in June after losses in April and May. With increased vaccinations and fewer restrictions, job growth should increase in July, validating the central bank’s reduction in asset purchases. 
 
The Bank of England voted 7 to 1 to leave monetary policy unchanged on Thursday. Inflation forecasts were upgraded, GDP estimates were left unchanged and the central bank provided a little more clarity of the direction of future policy., They said modest tightening may be needed in the next two to three years with interest rate hikes likely to precede end of QE. More specifically, they expect QE reinvestment to end when rates hit 0.5%. Previously, back in 2018, they said they would not start the unwind of QE until interest rates hit 1.5%. GBP/USD traded slightly higher on the back of the rate decision.