This Friday, we are expecting July Non-farm payrolls and now more than ever, with the EUR/USD trading near its record highs, the amount of jobs created last month will be critical in determining where the dollar is headed next.
For the past few months, the stability of the labor market has pacified concern about the housing market because as long as people have jobs, they will continue to pay their mortgages. However the problems in the housing market are worsening with sharp drops seen in existing, new and pending home sales for the month of May. In fact, pending home sales dropped by the biggest amount in more than 5 years which means that the US economy could be in serious trouble if the labor market buckles. Thankfully, the labor market will probably be spared in the month of June. According to the ADP employment survey, private companies added 150k jobs last month, which is not only far stronger than the market?s 100k forecast, but also represents the fastest pace of growth in seven months. Taken together with a 17 percent drop in layoffs and we have the recipe for strong and healthy job growth. Currency traders are buying back dollars as well after this morning?s upside surprises. Our latest FXCM Speculative SentimentIndex indicates that retail traders have been selling Euros ahead of payrolls. Whether this is just a bump in the road to further losses in the dollar or a double top in the EUR/USD and GBP/USD will ultimately be determined by Friday?s non-farm payrolls release. Even though the current consensus estimate for payrolls is 125k, according to the Bloomberg survey, the range of estimates is between 80k and 150k. This divergence suggests that payrolls can be anyone?s game, so as usual anticipate a volatile trading session tomorrow.
What US Dollar Traders Should Watch
In order for non-farm payrolls to be dollar positive, we need to not only see job growth greater than 125k but also no downward revisions to the May data. In prior months, revisions have completely negated both the upside and downside surprises in payrolls. With a 157k print in May, there is a decent chance for significant revisions to the prior month?s report. Even if we see stronger than expected job growth in June, downward revisions to the May report could raise concerns about future growth. If both the headline and revision number turns out to be dollar negative however, then market watchers will pounce on the idea of sharply slower growth in the third quarter. The labor market is the backbone of the US economy and weak job growth poses a big threat to consumer spending. Even though the Federal Reserve is mostly concerned about inflation, with the housing market turning down, payrolls less than 100k will force them to look to cut interest rates this year. On the other hand, if the payrolls figure catches the market by surprise and increases by more than 150k, with no revisions to offset the dollar bullish number, this would send the dollar skyrocketing because it would be above even the most optimistic analyst expectations and exacerbate the turn that we are already beginning to see in the EUR/USD and GBP/USD in the process.
What is the market expecting for June?
Change in Non-Farm Payrolls: 123k Forecast, 157k Previous
Unemployment Rate: 4.5% Forecast, 4.5% Previous
Change in Manufacturing Payrolls: -11k Forecast, -19k Previous
Average Hourly Earnings: 0.3% Forecast, 0.3% Previous
Average Weekly Hours: 33.9 Forecast, 33.9 Previous
The odds are in favor of a stronger NFP number, but there are arguments supporting both weaker and stronger job growth:
Examining the NFP Leading Indicators
Arguments for Above 100k Non-Farm Payrolls
[B]- ISM Services Signals Stronger Job Growth
- ADP Employment Index Jumps To 7-Month High
- Challenger Job Cuts Improve For First Time In Two Months[/B]
Even though job growth in the manufacturing sector runs the risk of faltering in the month of June, the jump in the employment component of the service sector PMI report to an 11 month high suggests that non-manufacturing job growth could be healthy. As we all know, the US is service and not manufacturing based and non-farm payrolls reflect the former and not the latter. The ADP employment survey also showed that hiring accelerated at the quickest pace in seven months. Adding in stronger public sector employment and we could be looking at as much as 150k NFP in June. The ADP number proved highly bullish for the US dollar when combined with the Challenger, Gray & Christmas Inc. survey, which showed that job cuts dropped 17 percent in June from the month prior. Employment growth may have bottomed out and another above 100k print would indicate that the labor market remains healthy enough to drive a rebound in growth in the second half of the year.
Arguments for Below 100k Non-Farm Payrolls
[B]- ISM Manufacturing Signals Softer Job Growth
- Hudson Employment Index Plummets To A 9-Month Low
- Jobless Claims Mount
-
Monster.com Employment Index Dips 3 Points[/B]
There are also arguments for less than 100k job growth, but this is mostly from second tier data that may not be strong enough to offset the upside surprises reported this morning. First and foremost, although the ISM manufacturing index did pick up quite a bit in June, the employment component eased back to a three month low of 51.1. It appears that expected slowdowns in demand have led companies to cut back on hiring. A drearier outlook is confirmed by the Hudson Employment Index, which dropped for the third consecutive month to the lowest level since last September. A further look into the numbers also shows that only 19 percent of employees surveyed felt concerned about job security, the highest since September. Although consumption appears to be maintaining pace, as retail sales figures have been strong, we?ve seen consumer sentiment start to suffer, especially as employment in residential home construction faces losses amidst the massive slowdown in the housing sector. In fact, the University of Michigan confidence survey unexpectedly dropped to a nine month low of 85.3 while the Conference Board?s consumer sentiment report plunged to a ten month low of 103.9. Finally, in the month of June, the 4 week moving average of jobless claims increased to 318,500. This represents a jump from the 316,750 average that we saw last month as well as a return towards April levels. Throw in the lower than expected Monster Employment report and it?s easy to see why NFPs could also surprise to the downside. The index fell by 3 points to 189, but it is important to note that the results are still among the highest in the past year. Nevertheless, should we get a sub 100k print, expect the dollar to drop towards fresh lows against the Euro.
Conclusion
Keep an eye on both the headline and revision number. The price action in the dollar indicates that the market is readjusting for the possibility of a stronger number. With analyst estimates so skewed to the downside, the “bigger” reaction in the currency market may be to an upside versus downside surprise. The record high in the Euro is tough resistance and it has become even tougher after European Central Bank signaled that interest rates will most likely remained unchanged in August and September.