NFP Preview: Fed on edge after back-to-back disappointing jobs reports

The leading indicators point to a below expectations reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 500-600k range...

Jobs 2

Overview

“One data point is a dot, two’s a line, but three’s a trend

After back-to-back disappointing jobs reports (while US inflation figures have simultaneously come in at multi-decade highs), Federal Reserve policymakers are no doubt on the edges of their seats hoping we don’t see a full-out “trend” of slowing labor market growth confirmed this month.

Traders and economists are expecting an improvement to 700K net new jobs following last month’s soft 559k reading, with the average hourly earnings figure expected to rise 0.4% m/m, down a tick from last month’s 0.5% rise:

 

Source: StoneX

Are these expectations justified? We dive into the key leading indicators for Friday’s critical jobs report below!

NFP forecast

As regular readers know, we usually focus on four historically reliable leading indicators to help handicap each month’s NFP report, but due to the vagaries of the economic calendar this month, we won’t get to see the ISM Services PMI until next week, leaving just three relevant data points:

  • The ISM Manufacturing PMI Employment component printed at 49.9, down a tick from last month’s 50.9 print and barely slipping into into contractionary territory (< 50)
  • The ADP Employment report came in at 692K net new jobs, moderating from last month’s downwardly-revised 886K reading.
  • Finally, the 4-week moving average of initial unemployment claims fell to 393K, down from last month’s 428K print.

As a reminder, the state of the US labor market remains more uncertain and volatile than usual as it emerges from the unprecedented disruption of the COVID pandemic. That said, weighing the data and our internal models, the leading indicators point to a below expectations reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 500-600k range, albeit with a bigger band of uncertainty than ever given the current global backdrop.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which rose 0.5% m/m in May, will likely be just as important as the headline figure itself.

Potential NFP market reaction

Earnings < 0.3% m/m

Earnings 0.3%-0.5% m/m

Earnings > 0.5% m/m

< 600K jobs

Strongly Bearish USD

Bearish USD

Neutral USD

600K-800K jobs

Bearish USD

Slightly Bearish USD

Slightly Bullish USD

> 800K jobs

Slightly Bearish USD

Neutral USD

Bullish USD

The greenback surged against most of its major rivals through the month of June, bucking the previous two-month downtrend and leaving the dollar index near the middle of its range over the last year.

We don’t have to dig too deep to see a potential trade if the NFP report comes out softer than expected. EUR/USD, the world’s most widely-traded currency pair, is trying to form a short-term double bottom pattern near 1.1850 with a bullish divergence in the 14-day RSI indicator. If we see a third consecutive miss on the NFP report, EUR/USD could be poised for a bounce back toward the mid-1.1900s moving into next week.

Meanwhile, a stronger-than-anticipated jobs report could present a buy opportunity in USD/JPY. The pair tends to have the cleanest and most logical reaction to major US economic data and is already holding its breakout to 1+ year highs above 1.1100 as of writing.

How to trade with City Index

Follow these easy steps to start trading with City Index today:

  1. Open a City Index account, or log-in if you’re already a customer.
  2. Search for the market you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels.
  4. Place the trade.

More from NFP

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.