Interest charge

NFP Snapshot Leading Indicators Slow as Fed Sets to Move Forward

Overview of the NFP

In a bizarre statistical quirk, the US economy added “exactly” 428,000 jobs in each of the past two months. Of course, this statistic will almost certainly be surpassed by the time the May NFP report is released on Friday with revisions to previous months’ readings…not to mention that these reports are only estimates based on surveys of the situation on the American labor market. In any event!

Either way, this unlikely coincidence underscores a key point about the US job market: it’s still producing a solid supply of new positions, with employers competing to offer attractive salaries to attract talent. Against this backdrop, the Federal Reserve has pledged to rapidly tighten monetary policy to ensure that inflation does not become rooted in an upward wage-price spiral.

For the May NFP report, the consensus expectation is 325,000 net new jobs and the average hourly wage is expected to rise 0.4% month-over-month:

Source: StoneX

Although this is the final jobs report ahead of the Fed’s mid-June meeting, it is unlikely to have an immediate impact on monetary policy; Jerome Powell and company consistently noted that the central bank would raise interest rates by 50 basis points (0.50%) at each of the next two meetings, and traders took the hint, assessing a probability of 99 % to get exactly that in two weeks. .

Are expectations of the NFP justified? We dive below into the main leading indicators from Friday’s Critical Jobs report!

NFP forecasts

As regular readers will know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report, although unfortunately the ISM Services PMI report will not be released until after the NFP this month:

  • The Employment component of the ISM Manufacturing PMI came in at 49.6sliding into contractionary territory (
  • The ADP jobs report showed 128K net new jobs, well below expectations and down from last month’s downward-revised 202K reading.
  • Finally, the 4-week moving average of initial jobless claims rose to 206.5Kup from last month’s reading of 188,000

As a reminder, the state of the US labor market remains more uncertain and volatile than usual coming out of the unprecedented disruption of the COVID pandemic. That said, weighing the data and our internal models, leading indicators point to a reading slightly below expectations in this month’s NFP report, with overall employment growth possibly somewhere in the 225K-325K rangealbeit with a wider margin of uncertainty than ever given the current global context.

Either way, the month-to-month fluctuations in this report are notoriously difficult to predict, so we won’t place too much emphasis on forecasts (including our own). As always, the other aspects of the release, including the much-watched Average Hourly Earnings figure which came in at 0.3%m/m in the latest NFP report.

Potential reaction of the NFP market

Wages

Wages 0.3-0.5%

Wages > 0.5%

USD sharply bearish

USD slightly bearish

USD slightly bullish

250,000 to 400,000 jobs

USD bearish

USD neutral

USD bullish

> 400K jobs

USD slightly bearish

USD slightly bullish

USD strongly bullish

The US Dollar Index hit nearly 20-year highs in the 105.00 area in mid-May before falling sharply back into the 102.00 range as of press time. As a result, the greenback is neither overbought nor oversold in the near term, leaving our overall outlook for the global reserve currency relatively neutral.

As for potential trade setups, readers may want to consider opportunities to sell EUR/USD on a stronger than expected jobs report after the pair failed to overcome resistance. of 1.0770 and broke below its short-term bullish channel earlier in the week. As investors grow increasingly wary of the sustainability of the European economy, a strong US jobs report could push the pair back below 1.0600.

On the other hand, a weak employment report could present a selling opportunity in USD/CHF. The safe-haven pairing charted a similar peak to the broader dollar index throughout May, but rates failed to form a meaningful rebound this week, suggesting a breakout further low from here could extend the selling pressure. A move below 0.9550 would open the door for a move towards the mid to 0.9400 next week.

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