NFP Preview: 75bps hike likely even if jobs disappoint

Weakness in employment components of the ISM manufacturing and services PMIs point to a potentially disappointing jobs report

Jobs 3

I am going to state something that might sound a bit controversial about Friday’s US monthly jobs data, before we get into the details of it. It is this: I just don’t think the market is not going to care too much about this month’s non-farm payrolls report. Regardless of the outcome, I just can’t see how or why the dollar will move sharply because of the data release. After all, employment is no longer in focus. It is all about the Fed’s other mandate: inflation.

Surging inflation and weakness in economic growth have been the story of 2022 so far. More recently, worries about the latter has leapfrogged the former. The market has started to price in a recession. Yield curves have inverted. Commodities have tanked. The dollar has roared higher against all major currencies.

Fed’s focus is no long on employment

 

The Fed will not want to focus away from inflation, just yet. But it too knows that the economic outlook is going to deteriorate with its aggressive hiking. Indeed, according to the minutes of its last policy meeting, the FOMC has admitted that "with inflation remaining well above the Committee's objective, participants remarked that moving to a restrictive stance of policy was required to meet the Committee's legislative mandate to promote maximum employment and price stability." The minutes revealed that policymakers at the Fed had 'concurred' that inflation outlook had deteriorated, and “many on FOMC saw significant risk of entrenched inflation.”

75 basis point hike likely coming up anyway

 

Against this backdrop, the Fed is going to hike rates by at least 50 basis points at its July meeting, but 75 appears more likely. Markets are pricing in a 90% probability of a 75bps hike, attaching less than 10% chance for a 50bps hike. Friday’s jobs report is not going to change that outlook.

One month is not a trend

 

I reckon that any surprise weakness in employment isn’t going to deter the Fed from its hawkish path, since it is determined to create a soft landing to bring down inflation. After all, the Fed likes to see a trend before making a change in policy. One month’s worth of data isn’t going to change their outlook about the labour market.

Expectations

 

All the said, the dollar will probably move sharply in the short-term outlook in reaction to the data release, but it won’t matter in the grand scheme of things. It is likely to react more profoundly if the data beats expectations. Here’s what economists are expecting to see on Friday:

  • Headline NFP: 275K vs. 390K last month
  • Unemployment rate expected unchanged at 3.6%
  • Average Hourly Earnings: +0.3% m/m for the third month in a row
  • Year-over-year, average hourly earnings expected to have eased to 5.0% from 5.2% in May.

 

NFP prints so far in 2022

 

History

Actual

Forecast

Jun 3, 2022

390K

325K

May 6, 2022

428K

390K

Apr 1, 2022

431K

492K

Mar 4, 2022

678K

407K

Feb 4, 2022

467K

110K

Jan 7, 2022

199K

426K

 

ISM Manufacturing PMI employment

 

The employment sub index in the Manufacturing PMI contracted for a second straight month. It came in at 47.3, some 2.3 percentage points lower than the 49.6 percent recorded in May.

ISM Services PMI employment

 

The employment sub index of the services PMI contracted, by 2.8 points to 47.4 down from 50.2 in May

JOLTS Job Openings

 

Job openings still look quite healthy at 11.25 million vs 11.05 million expected, and a revised 11.68 million last time.

 jobs

Potential NFP market reaction

 

The weakness in employment components of the ISM manufacturing and services PMIs point to a potentially disappointing jobs report. But as mentioned, the NFP is becoming less and less relevant for the markets as the focus has turned to inflation and economic growth than employment. Thus, the only thing that will matter from the jobs report is the wages bit. Workers will be demanding higher pay to keep up with inflation. Watch average earnings for upside surprises, as the market will put more emphasis on it this time.

 

 

Wages < 0.2%

Wages 0.2-0.3%

Wages > 0.4%

< 200K jobs

Strongly Bearish USD

Slightly Bearish USD

Slightly Bullish USD

200K – 300K jobs

Bearish USD

Neutral USD

Bullish USD

> 300K jobs

Slightly Bearish USD

Slightly Bullish USD

Strongly Bullish USD

 

EUR/USD nears parity

 

Ahead of the NFP, the greenback has reached its highest point since 2002 against a basket of foreign currencies, driven by weakness in the EUR/USD which has also fallen to its weakest level since 2002.

Will the release of NFP trigger another sharp slump in EUR/USD to parity?

eurusd

 

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account