US Non-Farm Payrolls Preview

May 6, 2016

The US Labor Department’s Non-Farm Payrolls (NFP) report, due to be released this Friday morning, has long been used as a primary barometer of the overall employment situation in the US as well as a key input affecting the Federal Reserve’s policy decisions.

Since the fourth quarter of 2015, these employment numbers have shown consistent strength, significantly beating monthly expectations for most of the past six months, with the exception of January’s data. Since the Fed’s last rate hike in December, the strong labor market has remained the comparative bright spot in the US economy amid other economic data releases that have frequently disappointed expectations and pointed to a slowing of US economic growth.

This strength in the labor market was mentioned in last week’s FOMC statement, which provided a mixed assessment of US economic conditions, highlighting significant improvements in labor but a slowdown in other economic growth indications. Despite acknowledgement of this healthy employment situation, however, the Fed remained characteristically dovish and cautious, opting to keep interest rates unchanged, as expected, and providing little in the way of guidance as to the probability of further rate hikes this year. Once again, the FOMC kept with its old refrain that its policy outlook will continue to be dependent upon economic data going forward, and that its pace of tightening would likely be gradual.

If even the succession of strong employment data in recent months has been insufficient in swaying the Fed any further towards the hawkish side, the potential impact on the US dollar of a better-than-expected NFP this Friday is unlikely to be extensive or sustained.  In contrast, a worse-than-expected reading could prompt a significant extension of the dollar’s recent pullback, as it would likely help reinforce the Fed’s already-dovish leanings.

Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, have recently vacillated around 200,000 jobs added for the month of April. However, Wednesday’s ADP employment report, which often serves as somewhat of a limited leading indicator for NFP Fridays, fell far short of expectations at 156,000 jobs added in April against prior forecasts of around 200,000, representing a sharp drop from the revised 194,000 in the previous month. With this substantial disappointment from the ADP data, prospects could very likely have fallen for the NFP.

Despite this, other recent employment-related data for April have generally shown better-than-expected results, including numbers that have increased since the prior month for both manufacturing PMI employment (increase of 1.1 to 49.2) and non-manufacturing PMI employment (increase of 2.7 to 53.0), as well as generally healthy initial jobless claims that have fluctuated for the past four weeks not too far from their lowest levels in decades.

In light of these mixed data points, the actual NFP numbers on Friday could potentially fall within a loose range between the ADP’s neighborhood around 150,000 and consensus estimates of approximately 200,000, with a midpoint area falling around 175,000. Any substantial deviation from this general range could make a significant market impact, primarily on the US dollar. In particular, both EUR/USD and USD/JPY could make some substantial moves, as is often the case, depending on Friday’s actual reading and its monetary policy implications.

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