US NFP Preview: Softer-than-expected or roughly in-line data to keep soft USD trend in place – Credit Suisse
|Economists at Credit Suisse preview the Nonfarm Payrolls release and consider key possible ensuing market scenarios.
Stronger-than-expected NFP readings could trigger renewed USD strength
“Stronger-than-expected NFP readings could drive pushback against the dovish drift in Fed policy expectations, triggering renewed USD strength in the process. The likely mixed liquidity conditions could amplify market moves. However, barring shocking data outcomes, we’d look to stick to our strategy of fading USD strength against EUR and would wait for next week’s US CPI data before making a more comprehensive assessment.”
“Softer-than-expected or roughly in-line numbers validating the dovish Fed narrative can keep the current soft USD trend in place.”
“In the unlikely event that the data were to show shockingly weak numbers, featuring a sharply higher unemployment rate and/or an NFP print well below the low end of the Bloomberg analyst forecast range (currently 150K), broader risk-off price action might complicate the FX picture and keep USD weakness more focused in ‘safe haven’ pairs such as USD/JPY and more mixed elsewhere, with USD-EM likely sharply higher. We view this as a tail risk, it is not our baseline scenario.”
See – US Nonfarm Payrolls: Banks Preview, labor market still going strong
Nonfarm Payrolls FAQs
What are Nonfarm Payrolls?
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls' result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
How does Nonfarm Payrolls affect the US Dollar?
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls' figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
How does Nonfarm Payrolls affect Gold?
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls' figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Sometimes NonFarm Payrolls trigger an opposite reaction than what the market expects. Why is that?
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the "Great Resignation" or the Global Financial Crisis.
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