NFP Preview: Would a Strong Jobs Report Put a Q3 Fed Hike in Play?

NFP Key Points

• NFP report expectations: +114K jobs, +0.3% m/m earnings, unemployment at 4.3%.
• NFP leading indicators point to a potentially above-expected reading in this month’s jobs report, with headline job growth coming in somewhere in the 125-175K range.
• The US Dollar Index (DXY) has broken out to a 14-month high, opening the door for a bullish continuation if the jobs report beats expectations.

When is the May NFP Report?

The June NFP report will be released on Thursday, July 2, at 8:30 ET.

NFP Report Expectations

Traders and economists expect the NFP report to show that the US created 114K net new jobs, with average hourly earnings rising 0.3% m/m (3.5% y/y) and the U3 unemployment rate at 4.3%.

NFP Overview

Last month, we highlighted fears of a coming AI “Jobpocalypse” and why the evidence of mass displacement of workers remains unconvincing for now. As it turns out, new FOMC Chairman Kevin Warsh has been pondering the same question and came to a similar conclusion, stating at the ECB annual conference in Sintra earlier today that the impact of AI on the jobs market is “still uncertain.”

In any event, the headline NFP reports have remained resilient this year, with four of the first five monthly reports coming in better than expected and an average of +82K net new jobs per month so far this year. Perhaps not surprisingly against that backdrop, traders are anticipating another solid report this month:

Source: StoneX

As the graphic above shows, expectations are for another steady jobs report, with modest job growth, stable unemployment, and continued gradual wage increases.

With inflation holding well above the Federal Reserve’s 2% target, traders are pricing in another interest rate hike from the Federal Reserve as soon as this month, with the CME’s FedWatch tool showing about a 30% probability of such a move, after Chairman Warsh struck a relatively hawkish tone in his first FOMC meeting:

Source: CME FedWatch

NFP Forecast

As regular readers know, we 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 access to the ISM Services PMI report until after the NFP report:

• The ISM Manufacturing Employment subindex rose to 49.7 from 48.6 last month.
• The ADP Employment report came in at 98K jobs, down from last month’s 122K reading.
• The 4-week moving average of initial unemployment claims rose to 224K, up from 215K last month.

Weighing the data and our internal models, the leading indicators point to a potentially above-expected reading in this month’s jobs report, with headline job growth coming in somewhere in the 125-175K range, albeit with a big band of uncertainty given the limited response rates.

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, including the closely watched average hourly earnings figure and unemployment rate will also impact how markets react to the release.

Potential NFP Market Reaction

	Wages < 0.2% m/m	Wages 0.2-0.4% m/m	Wages > 0.4% m/m
< 80K jobs	Bearish USD	Bearish USD	Slightly Bearish USD
80-150K jobs	Neutral USD	Neutral USD	Slightly Bullish USD
> 150K jobs	Slightly Bullish USD	Slightly Bullish USD	Bullish USD

Technically speaking, the US dollar is trading near its highest level in more than a year against its major rivals, hinting at downside potential if the report shows a slowing labor market.

US Dollar Index Technical Analysis – DXY Daily Chart

Source: TradingView, StoneX

As the chart above shows, the US Dollar Index (DXY) has broken out to a 14-month high above the key 100.50 level, confirming the bullish trend and opening the door for a bullish continuation if the jobs report beats expectations.

In that scenario, a continuation toward the May 2025 high near 102.00 could be in play as traders start to seriously price in a Q3 rate hike from the Federal Reserve. On the other hand, a slowdown in the labor market would have traders pushing back expectations for an interest rate increase, likely weighing on the greenback in the near-term. Even then, the medium-term bullish structure in the Dollar Index would remain bullish as long the breakout level at 100.50 holds as support.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX