NFP Preview: Dollar bracing for another potential jobs disappointment

Wednesday’s release of minutes from the June FOMC meeting showed that Fed officials were divided on several fronts, including the timing of balance sheet reduction, the outlook for inflation and employment, and the impact of these economic conditions on the future trajectory of Fed monetary policy.  These uncertainties have continued to weigh on the dollar, despite the rebound for the US currency that occurred earlier this week. Market expectations remain skewed towards one more Fed rate hike this year. But the prospects of such a hike, given these uncertainties, are not as clear as they have previously been.

Adding to doubts over Fed policy has been the recent US employment landscape. The past three months have seen relatively weak numbers. A disappointing 138,000 jobs were reported to have been added in May, against a prior forecast of around 180,000. Furthermore, the US Labor Department last month also revised April’s data from a previously better-than-expected 211,000 jobs down to a worse-than-expected 174,000. Finally, March numbers were further revised down to 50,000 from an already disappointing downward revision to 79,000 from the initial 98,000 reported.

Going forward, will this relative softness in the US labor market continue, potentially impacting the path of monetary policy? The official US jobs report for June will be released on Friday morning. This will include key employment data including the change in non-farm payrolls (NFP), the unemployment rate, and wage growth. In the run-up to this release, key jobs-related economic data have suggested that Friday’s numbers may just miss the mark once again.

NFP Expectations

Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and wage growth, are currently around 175,000 jobs added for the month of June. The June unemployment rate is expected to have remained steady from the previous month at a low 4.3%, while average hourly earnings are expected to have increased by 0.3%.

Jobs Data Preceding NFP

Key employment-related data releases for June preceding Friday’s NFP included the ADP private employment report, ISM non-manufacturing and manufacturing PMI employment components, and weekly jobless claims data throughout the month.

Thursday’s ADP data showed worse-than-expected numbers at 158,000 private jobs added in June against previous forecasts of around 185,000. Furthermore, May’s ADP numbers were revised down from a stellar 253,000 to a somewhat less stellar 230,000. Although the ADP report is not necessarily a very accurate pre-indicator of the official NFP jobs data from the US Labor Department – and sometimes even misses the mark dramatically – it does help provide a useful guideline when used in conjunction with other employment-related data.

One of the most important of these other indicators is the ISM non-manufacturing (services) PMI employment component, which showed a slower pace of job growth (at 55.8) in June than in the previous month (57.8). While the ISM manufacturing PMI employment grew faster in June at 57.2 versus May’s 53.5, the services sector is generally considered a more critical barometer of the US economy than manufacturing.

Finally, June’s weekly jobless claims data was mostly in-line with expectations, generally remaining low overall from a historic perspective. Of the four weeks that made up the bulk of June, unemployment claims fluctuated around the 240,000 region, with the notable exception of the most recent week’s data, released on Thursday, which showed a modestly higher (worse) than expected 248,000 unemployment claims against the 243,000 forecast.

Forecast and Potential Market Reaction

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.

NFP Jobs Created and Potential USD Reaction
> 200,000
Bullish

176,000-200,000
Moderately Bullish

160,000-175,000
Neutral

140,000-159,000
Moderately Bearish

< 140,000
Bearish