NFP: Payrolls over expectations, but unemployment rate & earnings miss

 

"And again Non Farm Payrolls Range is 50,000, established in 1939 when the release began. Certain months maybe 49,000 or even 51,000 but 50,000 is solid. NFP inside the 50,000 interval then prices range. Outside then bottoms and tops break. Today's number is 179,000 so range is 129,000 to 229,000. Range trades mean long bottoms and sell tops comfortably. Sadly, amongst all the analyst, nobody will enter the required data to forecast NFP correctly." by Brian Twomey

 

“... strong headline was clearly offset by poor wages. The world's largest economy created 222,000 new jobs, largely surpassing expectations of 179K, while previous' month reading was revised up to 152K from an initial estimate of 138K. Nevertheless the unemployment rate ticked up to 4.4%, with the participation rate up to 62.8%, while wages were once again a big miss, barely advancing 0.2% in the month, below expectations of 0.3%, and up yearly basis by 2.5%, also missing market's forecast of 2.6%. “ by Valeria Bednarik

 

"America doesn’t have a worker shortage; it has work shortage. The unemployment rate is at 15-year low, but only 55% of American adults 18 to 64 have full-time jobs… According to demographer Nicholas Eberstadt, the labor participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression.” by Raymond Merriman

 

Though, the official Labour Department's report showed that the country's private sector added 222K jobs last month, surpassing market expectations for a modest increase of around 175K in June. Meanwhile, May's figure was revised up to 152K from 138K registered previously. The US non-farm payrolls increase, the second largest within this year, was supported by strong gains in government, healthcare, restaurants as well as business and professional services sectors, the Labour Department revealed. Notwithstanding job growth acceleration, the unemployment rate was slightly higher, at 4.4%, suggesting that more people were left without job. 
In addition, the report showed that average hourly earnings rose modestly, jumping 0.2% over the month of June, with 2.5% yearly increase in wages. Analysts believed that weak productivity was curbing wages, while some of them were optimistic over the tightening labour, expecting it to spur wage growth at a faster pace. “ by Dukascopy Bank Team

“[...] some of the sell-off in the yellow metal may also be down to the spectre of low inflation in the west, especially wage growth, which could ultimately limit how far central banks can hike rates. This exemplifies the fears that could keep gold bears up at night: a surge in volatility or a talking down of rate increases from CB's like the Fed, Yellen testifies to Congress this week, could see a dramatic turnaround in the gold price. “ by Kathleen Brooks

"The US economy added 222’000 non-farm jobs in June versus 178’000 expected. The May figure has been revised up from 138’000 to 152’000. On the flip side, the unemployment rate increased to 4.4% from 4.3%, while the average hourly earnings improved less than expected. The better-than-expected NFP figure sent the US 10-year yields near 2.40% for the first time in two months, yet failed to give a further boost to the US dollar.” by Ipek Ozkardeskaya

 

"The strong jobs number appears to have convinced many players that the US economic recovery is back on track and perfectly capable of weathering continued monetary tightening from the Federal Reserve. This is despite yet more evidence (through tepid wage growth) that inflation is still heading further away from the Fed’s 2% target. “ by David Morrison

 

"Friday’s US Employment Situation report has done little to change the market’s view that a third 2017 hike will be seen. The dollar continues to make ground after the strong headline Non-farm Payrolls and a pick up in the participation rate point towards stronger labour market. However the stubbornly low earnings growth remains a concern for pulling inflation sustainably towards the Fed’s mandated 2% target. The dollar has strengthened in the wake of the payrolls, and as yet retains this strength.” by Richard Perry

"The establishment survey showed nonfarm payrolls expanding a consensus-beating 222K in June. Adding to the good news were upward revisions to prior months that increased payrolls by 47K. The private sector added 187K jobs with gains in both the goods (+25K) and services (+162K) segments. Goods sector employment rose in construction (+16K) and mining (+8K) and stayed roughly flat in manufacturing (+1K). Private services sector employment was up in financial activities, professional services, leisure & hospitality, and education & health services. Meanwhile government added 35K positions. Average hourly earnings rose 0.2% in June, or 2.5% on a year-on-year basis (up one tick compared with May's print). In addition, the private sector employment diffusion index climbed to 59.6 (from 54.8 the prior month), indicating that job gains in June were distributed more evenly across sectors.
The other employment report, the household survey, showed employment increasing 245K in June after posting a -233K print in May. Full-time jobs were up a robust 355K on the month for a cumulative gain of 1.7 million so far in 2017. The increase in jobs during the month was offset by a one tick increase in the participation rate to 62.8%, causing the unemployment rate to add one tenth of a percentage point at 4.4%. Overall, the job reports support our view of abovepotential growth in the coming months and hint in the direction of another hike by the Fed in September.” by National bank of Canada Eco. & Start. Team

 

"The U.S. economy added 222 thousand jobs in June and job creations in April and May were revised higher. Nonetheless, unemployment ticked slightly higher to 4.4% in June from 4.3% May, but this may also be considered a positive development with more Americans joining the Labor force. 
The initial reaction of the greenback and Treasury yields after the release was kind of mixed. In fact, there was a tug of war between bulls and bears suggesting that some market participants were not entirely convinced in the overall report. This is due to lack of significant wage growth which has been disappointing for many months now.
Fed Chair Janet Yellen is a big believer of the Phillips Curve which suggests that inflation has an inverse relation with unemployment. However, without wage growth and inflationary pressures it is hard to convince markets that interest rates will increase at the pace suggested by monetary policy makers. Given that the U.S. economy is at full employment levels one questions why wage growth is not accelerating? Probably there isn’t a one simple explanation to this question, but it could be due to the weak bargaining power of employers, globalization which allows U.S. companies to shift production where cost is cheaper, shrinking productivity, a decline of union power, and the list goes no. Though the problem is clearly structural here and if investors remain skeptical that wages will rise soon any rise in the dollar will be limited. “ by Hussein Al Sayed

 

"The inflation component of the jobs report was softer, with a 0.2 percent gain in wages on a monthly basis but the central bank has agreed to move ahead without much inflationary pressure. “ by Alfonso Esparza

 

"At first glance, Friday’s non-farm payrolls data for June far surpassed expectations at 222,000 jobs added against prior expectations of around 175,000. Additionally, May’s disappointing 138,000 figure was made slightly less disappointing by Friday’s upward revision to 152,000. Overall, however, the jobs report was mixed, as average hourly earnings came in lower than expected at +0.2% against a +0.3% forecast, and May’s +0.2% was revised down to +0.1%. These weaker wage growth numbers should exacerbate concerns that inflation may continue to lag. In addition, another less-positive aspect of the report was the unemployment rate, which ticked up to 4.4% against both the prior forecast and last month’s reading of 4.3%. 
The implications of this report are mixed. The fact that the headline NFP number surpassed expectations by a considerable margin provides confidence that the US employment landscape remains strong and average job gains over the past several months are indeed gaining ground. This supports further Fed tightening. Low inflation, however, still poses a challenge for the Fed. “ by James Chen
 

"We got a stronger bounce in employment than I expected. Nonetheless, there is a clear weakening pattern pattern from year to year. More significantly, weak wage growth has not keep up with inflation, despite the BLS purporting otherwise.” by Mike “Mish” Shedlock's

 

“Perhaps the most encouraging elements of this report, after the headline NFP number, was the pick up in the labour force participation rate (up to 62.8% from 62.7%), and the increase in weekly average hours worked, which rose to 34.5 hours from 34.4. While a month’s worth of data does not make a trend, an increase in working hours and a rise in the labour force participation rate, if it continues, would suggest a fundamental improve in the US labour market, which would be a positive development for the US economy.”  by Kathleen Brokks

 

“The unemployment rate rose to 4.4% from 4.3%, as labour force growth exceeded employment growth. The increase comes after the unemployment rate has fallen from 4.8% in January so given its volatile nature, it is not a big concern. The Fed’s favourite slack indicators,
the so-called underemployment rate (U6 unemployment, a broader unemployment measure) rose to 8.6% from 8.4%.” by Danske Research Team

 

“As always, we like to look at the quality of the jobs created, not just the absolute quantity. On this front, the outlook is more mixed. For the "glass half full" camp, the average hours worked bumped up from 34.4 to 34.5, signaling a growth in full-time employment. However, and this is a big "but", average hourly earnings remain stuck in the mud. Earnings rose only 0.2% month over month (and that's rounded up from .15%, or $0.04/hr), below expectations of a 0.3% rise. On an annualized basis, wages rose 2.5% vs. 2.6% eyed.” by Matt Weller

 

Market Reaction

“Like the NFP data release itself, the immediate market reaction was also mixed. The first knee-jerk reaction to the headline beat was a spike up for the US dollar. Then a whipsaw reversal occurred as the less positive aspects of the data were digested. Finally, the dollar regained its footing and surged once again. As is typically the case, gold took the opposite route. The precious metal first spiked down, then reversed higher, and finally continued to fall as the dollar rose. US equity markets took the headline beat and ran with it, rising in pre-market and continuing to surge after the open to pare losses from Thursday. USD/JPY reached up to hit key resistance around the 114.00 level as the dollar rose while yen demand faded.“ by James Chen

 

“The dollar index is back above 96.0, and US Treasury yields are also higher. We mentioned in our pre-NFP analysis that USD/JPY and GBP/USD are the dollar pairs most sensitive to the NFP report, while the euro and stocks have no correlation of note. Our analysis has played out today, with the JPY and GBP the weakest performers vs. the USD in the G10, falling 0.8% and 0.7% respectively. USD/JPY has had a strong positive reaction to this report, rising to its highest level since May and is heading towards 115.00 key resistance, while GBP/USD backed away from recent highs. “ by Kathleen Brooks

“[...] today's NFP report is a "Goldilocks" reading for stocks: the strong job growth is indicative of a healthy economy, while the lack of wage pressure means there's no urgency for the Fed to tighten policy further. Sure enough, US stock futures have surged into positive territory.
In the FX market, the dollar initially dipped but has rallied back to trade flat-to-slightly-higher against many of its major rivals as of writing. “ by Matt Weller

 

 

Before the release:

 

 

“US jobs report for June will probably turn out somewhat better than the previous three reports. We expect employment rose 180,000 with the unemployment rate unchanged at 4.3% in June. Average hourly earnings are expected to rise 0.3% m/m, implying an annual growth rate of 2.6% y/y (up from 2.5%). While most labour market indicators are now stronger than during the recent upturn, the slack indicators still suggest there is some slack left in the labour market. With the rate hike in June, the Fed sent a clear signal to us that it is not as data dependent as it claims to be, and is biased towards a normalisation of rates. The reason is Fed Chair Yellen's faith in the Phillips curve. The problem is second-round effects have hit wage growth. When employees expect inflation to remain low, they can live with low wage nominal wage, as real wage growth may still be solid.“ by Danske Bank

 

"US economy is expected to have added 179K jobs in June compared to 138K jobs in May. The US is close to full employment, so we should expect the monthly payrolls figure drop. Thus, a weaker-than-expected number is not bad news unless the figure prints well below 100.00. On the other hand, a super strong number would mean there is still considerable slack in the labor market, thus Fed needs to go slow with policy normalization. That would be bearish for the US dollar." by Omkar Godbole

 

"The Fed policy tightening stance now appears to rely almost solely on the labor market; if this were to lose momentum, the recent Fed hawkishness might be walked back. [...] The Preliminary University of Michigan Consumer Sentiment survey released on 16 June showed confidence slipping in June to a low since November last year. The weekly Bloomberg consumer comfort index also slipped last week to a low since February. Overall consumer sentiment remains at a high level. However, we may be on the cusp of some correction in sentiment surveys.[...] With many other economic indicators suggesting growth may be stalling, the onus will be even more on the labor data to sustain the Fed’s policy tightening regime. Payrolls growth has slowed this year, averaging 121K over the last three months to May. However, this slowdown may be indicative of a tightening labor market, with less suitable skilled workers to fill jobs." by Greg Gibbs

 

"There were “several” FOMC members concerned that low inflation would persist and that the historical relationship between “resource utilization” and inflation [Phillip’s curve] “appeared to be weaker than in previous decades.” And “some participants” emphasized downside risks, particularly in light of the recent low readings on inflation along with measures of inflation compensation and some survey measures of inflation expectations that were still low.” Countering these views, “a couple of participants expressed concern that a substantial undershooting of the longer-run normal rate of unemployment could pose an appreciable upside risk to inflation or give rise to macroeconomic or financial imbalances that eventually could lead to a significant economic downturn.” by Greg Gibbs

 

“The FOMC will concentrate on the wages and work-week data as signals of coming inflation. The market will get excited over a headline number likely to be revised next month. Last month’s data will likely be revised (probably higher) following a considerably weaker than average/expectation release. Analyst expectation for the data has been replaced by the moving average of the last six months data as the actual is so unpredictable.[...] For the record market expectation is for 178k new jobs to have been added. Personally, I am looking at a number closer to 200k as the pickup in activity continues. “ by Alan Hill

 

"The 138,000 jobs added to the economy in May came sharply below the expected 185,000. Wage growth also disappointed with average earnings rising 2.5% annually. If the jobs report managed to surprise to the upside this time, the USD will likely find a near-term bottom. However, the headline figure won’t be enough even if it came above 180,000. Wage growth is what’s needed to narrow the disparities between the Fed’s dot plot and the markets own dot plot." by Hussein Al Sayed

 

“...data released on Thursday showed that the number of Americans filing for jobless aid rose 2K to 244K in the week ended June 23, whereas analysts anticipated a fall to 241K." by Dukascopy Bank Team

 

“Employment data out of the US next week will be pivotal for the direction of the USD if there is significant improvement in wage growth. The US has posted solid job gains, but the quality of those positions is being questioned, in order to make a dent in the market perception the inflation signals have to be strong to further validate the current rate hike path of the central bank." Alfonso Esparza

 

"Yellen and other economists have an abiding faith in the Phillips Curve—the trade-off between employment and inflation. The Phillips Curve has been refuted hundreds of times over the past forty years and yet its seeming inherent logic persists. What are the conditions under which full employment fails to result in wage increases that drive inflation? There must be some set of conditions under which this is true. You don't have to buy into the pictures of downtrodden labor under the thumb of cruel capitalist masters to observe that full employment does NOT always result in wage increases. And even when you do get wage increases, you don't always get inflation.[...] Bottom line, the absence of household spending in Japan and thus the absence of inflation remains a mystery that the Phillips Curve cannot resolve." by Barbara Rockefeller

 

“Looking ahead, the US nonfarm payrolls data will be coming out later today. Expectations are for a headline jobs print of 175k, while the average earnings are expected to rise 0.3% on the month. The US unemployment rate is expected to remain steady at 4.3%.” by John Benjamin

 

“We expect the payrolls to be solid (at least meeting the consensus estimate of 178 000 net additional jobs) despite yesterday’s disappointing ADP report. The average hourly earnings are expected to rise 0.3% M/M and 2.6% Y/Y. A gradual rise in wages could ease markets’ doubts on the Fed normalisation process. Such a scenario would give the US currency renewed interest rate support. Especially short-term interest rate differentials should re-widen than, which is USD supportive. If so, USD/JPY could rise further. “ by KBC Market research Desk

 

“We believe that the risks for the payrolls are on the upside of expectations as the three previous months looked to be unusually low.. The unemployment rate could stabilised or even tick up after a (too fast?) decline in past months. The AHE wages are expected to be up 0.3% M/M. We have no strong take on the wages, but a disappointment might colour the market reaction." by KBC Market research Desk

 

"The headline Non-farm Payrolls are expected to recover to +179,000 (up from +138,000) whilst attention will also be paid to prior month revisions. The average hourly earnings will also be keenly watched with the recent inflation drop in the US potentially a reason for the Fed to pullback on tightening too quickly. Average hourly earnings are expected to be +0.3% for the month which would improve the year on year number to +2.7%. Unemployment is expected to be 4.3% again, whilst the decline in the U6 Underemployment number (last month 8.4%) will be of interest as the US closes in on levels considered to be full employment. This in conjunction with the participation rate will also be important, with the participation rate 62.7% last month." by Richard Perry

 

“Overall, while there were no abnormally large downside surprises in pre-NFP employment indicators for June, there was a general leaning towards the soft side when it came to June’s job numbers. This could potentially manifest as a continuation of weaker-than-expected employment data this Friday. With consensus expectations of around 175,000 jobs added in June, our target range is 160,000-175,000. This jobs report will be of critical importance in its potential impact on the near-term trajectory of Fed rate hikes. As such, any outcome significantly lower than forecast should further dampen Fed expectations and potentially lead to an extended pullback for the dollar. A result in the higher end of the target range or above could boost Fed rate hike expectations and help support a potential dollar relief rally and recovery after the recent period of sustained dollar weakness. “ by James Chen

 

"Yet Janet Yellen's positive outlook and the softness of last month's report are the only reasons why tomorrow's jobs number could be strong. Service sector activity accelerated in the month of June, but the employment component dropped to 55.8 from 57.8, reflecting slower job growth. ADP also reported its smallest payroll increase since October. 4-week average jobless claims ticked up from last month as continuing claims rose to its highest level since mid April. Consumer confidence is mixed, leaving Challenger's 19.3% reduction in layoffs as the only piece of data supporting stronger payroll growth since manufacturing jobs are a separate line item in the non-farm payrolls report. Considering that the U.S. dollar is held up primarily by the Fed's hawkishness, investors may not tolerate another month of weak job growth and could send the greenback sharply lower if NFPs miss. However if non-farm payrolls rises by 175K or more AND average hourly earnings increase 0.3% or greater, Yellen will be vindicated and USD/JPY will hit 114 and beyond." by Kathy Lien