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 FOREX.com

Follow these easy steps to start trading with FOREX.com today:

  1. Open a Forex.com account, or log-in if you’re already a customer.
  2. Search for the pair 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: 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.