US Non-Farm Payrolls Preview

3 June, 2016

This Friday’s Non-Farm Payrolls (NFP) report for May will be the last major employment data to be released before the highly anticipated FOMC meeting in mid-June, less than two weeks from now. In the past several weeks, the Fed has become increasingly hawkish on the likelihood of a near-term rate hike. Last week, Fed Chair Janet Yellen reiterated in a speech that a rate hike in the coming months would be appropriate if economic data continued to improve as expected. This comment reinforced earlier speeches by other FOMC members that similarly took a cautiously optimistic approach to impending monetary tightening. Yellen’s comments also extended the effects of unexpectedly hawkish minutes from April’s FOMC meeting that were released two weeks ago.

As a major input into the Fed’s decision-making and its criterion of continued improvement in US economic data, the NFP report and its accompanying figures on average hourly earnings and the unemployment rate should make a potentially critical impact on the likelihood of a summer rate hike by the Fed. Of course, other factors will also affect this probability, including the UK’s EU referendum that is scheduled for a week after the June FOMC meeting, but maximum US employment stands as one of the Federal Reserve’s key mandates.

With that being said, however, even with any better-than-expected NFP data on Friday, the still-present risk of a UK exit from the European Union, or a “Brexit,” could be sufficient in precluding a June rate hike by the ever-cautious Fed in favor of a potential July hike. Indeed, as of Thursday, the Fed Fund futures market currently sees the probability of a Fed rate hike in June at only less than 20%, whereas the implied probability of a July hike remains elevated at nearly 60%.

Since the fourth quarter of 2015, NFP employment data has shown relatively consistent strength, significantly beating expectations for most of the past seven months, with the exception of both January and the most recent release of April’s data. April showed a disappointing 160,000 jobs added against prior expectations of 200,000. Despite this disappointment, the US labor market has remained relatively strong overall amid other areas of the economy that have also shown continued improvement.

The potential impact of better-than-expected NFP data this Friday is likely to further boost the US dollar and lead to a continued slide for gold, as it would lend even more support for a summer rate hike (if not in June, than at least in July). In contrast, a significantly worse-than-expected reading could halt and reverse the recent rise in the dollar and drop in gold.

Consensus expectations for this Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are around 160,000 jobs added for the month of May. Thursday’s ADP employment report, which often serves as somewhat of a limited leading indicator for NFP Fridays, came in essentially in-line with expectations at 173,000 jobs added in May against prior forecasts of around 175,000, with an upward revision of April’s numbers to 166,000 from 156,000.

Other recent employment-related data for May have generally shown steady results, including numbers that have remained constant since the prior month for ISM Manufacturing PMI employment (49.2). The ISM Non-Manufacturing PMI employment data will be released after the NFP on Friday. Additionally, Thursday’s release of initial jobless claims for last week showed a modestly better-than-expected (lower) number of claims at 267,000 vs 270,000 expected. This follows the previous week’s encouragingly low numbers and generally continues the recent trend of decreasing unemployment claims that have fluctuated not too far from their lowest levels in decades.

In light of these leading employment data points, the actual NFP numbers on Friday could potentially fall very near or somewhat higher than the consensus estimates of approximately 160,000. Any substantial deviation from consensus, however, could make a significant market impact, primarily on the US dollar and dollar-denominated precious metals. 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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