From Horrendous to Stupendous

August 5, 2016

The past two Non-Farm Payrolls (NFP) employment reports both showed exceedingly large deviations from prior consensus forecasts – but in opposite directions. May’s data, released in early June, showed a colossally disappointing 38,000 jobs added in May against prior expectations of 160,000. This was later revised even further down to a minuscule 11,000 jobs added. In sharp contrast, June’s numbers, released early last month, revealed an exceptionally positive 287,000 additional jobs versus prior expectations of 175,000.

Combined with concerns over the then-upcoming Brexit vote, May’s horrendous employment data helped preclude a Fed rate hike during the mid-June FOMC meeting. Despite the sharp rebound in June’s employment numbers, which was duly acknowledged by the Fed, July’s FOMC meeting also resulted in no change to monetary policy due in part to ongoing concerns over low inflation. The next FOMC meeting takes place in September, and the futures market’s view of the probability of a Fed rate hike at that time currently sits at only around 12%.

Considering the fact that June’s very optimistic NFP outcome failed to sway the Fed any further in the direction of monetary policy tightening, Friday’s July NFP release could well have only a muted effect on the markets if the data comes out better than expected. In contrast, a significantly worse-than-expected outcome on Friday could have a substantial effect on both the US dollar as well as gold and the equity markets, as it could put yet another proverbial “nail-in-the-coffin” for a Fed rate hike this year. The current implied probability of a hike by the end of the year is only around 33%.

Any such downside surprise in Friday’s employment data should have a considerable effect in further pressuring the recently struggling US dollar, while extending the latest rally in gold. A worse-than-expected NFP showing would further decrease the likelihood of a near-term Fed rate hike, which should weigh heavily on the dollar while significantly boosting the appeal of gold, a non-interest-bearing asset. In the event that Friday’s NFP meets or exceeds expectations, however, the dollar could be moderately supported, while gold may see a modest pullback.

Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are at 180,000 jobs added for the month of July. The July unemployment rate is expected to come in at 4.8%, while average hourly earnings are expected to have increased by 0.2%.

Wednesday’s ADP employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in somewhat better than expected at 179,000 jobs added in July against prior forecasts of 171,000.

Other recent employment-related data for July have shown mixed results, including Wednesday’s ISM Non-Manufacturing employment component. This key survey came out at 51.4 for July, which still represents an expansion in non-manufacturing employment, but at a slower pace than June’s 52.7 reading. Monday’s ISM Manufacturing employment component, in contrast, showed a July contraction at 49.4, dropping significantly from June’s 50.4 expansion. Additionally, July’s weekly jobless claims data have also shown relatively mixed results. Thursday’s release covering the last week of July showed a slightly worse-than-expected (higher) number of claims at 269,000 vs 265,000 expected. The preceding week was also slightly worse-than-expected, while the first two weeks of July were moderately better than expected.

In light of these leading employment data points, the actual NFP numbers on Friday appear likely to fall in the relatively close vicinity of the expected 180,000 jobs added for July, with a target range around 175,000-185,000. As always, any exceptionally substantial deviation from consensus could make a significant market impact, primarily on the US dollar and commodities. 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 potential monetary policy implications.

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