US Non-Farm Payrolls Preview

July 8, 2016

In some ways, this Friday’s Non-Farm Payrolls (NFP) employment report for June should have significantly less of an impact on the Federal Reserve’s monetary policy decision-making than it has in recent months. This is due to the probability of a Fed rate hike at any time this year having already plunged dramatically since the “Brexit” bombshell shook global financial markets to the core, sparking immediate and intense volatility across asset classes, especially the FX markets.

Aside from persistent concerns over the potential financial and economic fallout from the UK’s vote to leave the European Union, the Fed has had to deal with dismal data from the last NFP report in early June, which showed a colossally disappointing 38,000 jobs added in May against prior expectations of around 160,000. Prior to the release of that report, the employment situation had generally remained a bright spot in the US economy within the past several months. The key question now is whether that very poor showing was just a one-time anomaly within a strong overall employment picture, or if it may possibly be a sign of more trouble to come.

Wednesday’s release of minutes from the latest FOMC meeting in June did little to provide any additional guidance on the outlook for US monetary policy going forward. As usual, Fed officials discussed the primary criteria for consideration of a rate hike, including a pickup in economic growth, gains in the labor market towards attaining full employment, and inflation climbing to the 2% target. As for the labor market, FOMC members agreed that they should not overreact to one disappointing employment report (especially since May’s workers’ strike at Verizon may have had some impact on the low numbers), but that a potential slowdown in hiring was certainly cause for concern and caution. Overall, the meeting minutes exhibited substantially dovish undertones as Fed officials discussed the employment situation and other aspects of the economy possibly contributing to a “broader economic slowdown.”

As noted, the market’s view of the probability of a Fed rate hike this year has dropped substantially after the Brexit vote. As it currently stands, 30-Day Fed Fund futures prices are showing a 0% implied probability of a rate hike at the next FOMC meeting in late July, with even a slight probability of a rate cut. September is not looking much better, fluctuating between 0% and the low single digits. By the end of the year, the current implied probability of a Fed rate hike only rises to less than 15%. In this dovish environment, even if Friday’s employment data shows a sharp turnaround from last month’s very bleak numbers, which it could well do, it would not likely be sufficient in turning the Fed back around to the hawkish side.

Despite this, if there is a significant surprise from the NFP data this Friday, there may indeed be a strong impact on the US dollar, which has remained supported as of late due in part to post-Brexit safe-haven demand. Such an impact could also have a major effect on gold, which has surged dramatically due to both its safe-haven appeal as well as plunging expectations for a Fed rate hike. Any better-than-expected US employment data on Friday should lead to further support for the US dollar while pressuring gold to pullback from its most recent highs. In contrast, another worse-than-expected reading could help reverse the dollar’s strength and lead to a continuation of the sharp rise in gold.

Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and average hourly earnings, are around 175,000 jobs added for the month of June. Thursday’s ADP employment report, which sometimes serves as a limited leading indicator for NFP Fridays, came in significantly better than expected at 172,000 jobs added in June against prior forecasts of 158,000.

Other recent employment-related data for June have also shown strongly positive results, including Wednesday’s ISM Non-Manufacturing employment data. This key survey showed a surge to 52.7 in June, which represents an expansion in employment, significantly up from May’s 49.7 contraction. Last week’s ISM Manufacturing employment data also showed an expansion at 50.4, in contrast with May’s 49.2 contraction. Additionally, Thursday’s release of initial jobless claims for last week showed a better-than-expected (lower) number of claims at 254,000 vs 269,000 expected. This follows a majority of weeks in June that showed generally low and steady unemployment numbers 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 meet or exceed the consensus estimate of approximately 175,000 jobs added for June, with a target range around 175,000-185,000. As always, any 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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