Economists are getting ready for this Friday’s Nonfarm Payrolls report. The United States Bureau of Labor Statistics will be out with theirs on Friday, and they are expecting another weak job gain of just 130,000 for May. This figure represents a drop from the revised increase of 177,000 jobs in April. Forecasters are quick to point out that this report is critical. Second, it serves as a barometer for the health of the U.S. labor market and the overall economy.
The Nonfarm Payrolls data is scheduled to be published at 12:30 GMT. Market watchers are looking forward to a release on the 13th that will confirm further cooling of the job market. This change would have major implications for monetary policy and currency valuation. A disappointing reading, particularly one below 100,000, may lead investors to reconsider the likelihood of a Federal Reserve interest rate cut in July.
The report pulls out job gain success stories. It Fareed’s terrific show also lays out all of the crucial indicators—wage growth, the unemployment rate, etc. Economists forecast the Nonfarm Unemployment Rate to remain unchanged at 4.2% for the second consecutive month. They’re looking for wage growth to tick up 0.3% m/m.
Importance of Nonfarm Payrolls
The Nonfarm Payrolls report is commonly considered to be the most important economic release in the US. It offers a recently-updated look at employment trends in all major sectors except for agriculture, government, and other select Yes, that’s written agriculture. And for that reason, it’s a key canary in the coal mine indicator for policymakers and economists to watch.
Nonfarm Payrolls are subject to large monthly swings. These shifts are in part due to seasonal adjustments, but due to broader economic trends. This volatility can lead to stark disruptions in financial markets, especially in foreign exchange markets. Forex traders closely monitor the Nonfarm Payrolls report, as it often influences their trading strategies and decisions regarding the U.S. dollar.
“Job growth should have cooled to its slowest pace in three months, with payrolls registering a below-consensus 110k gain in May.” – TD Securities analysts
According to the analysts at TD Securities, this is a sign that job creation is beginning to stall. This trend is most pronounced in the goods producing sector and in government service. They too expect to see a cooling trend in leisure & hospitality job growth. As the analysts stress, this may be an early indicator of more systemic economic trends and challenges that lie in wait.
Potential Market Reactions
The fallout from the Nonfarm Payrolls report goes beyond employment figures. A nice print should help shore up confidence in the U.S. economy and affect the Fed’s calculus about what to do with interest rates. On the flip side, an underwhelming report could usher in a fresh wave of U.S. dollar selling as investors recalibrate monetary policy outlooks.
A stronger-than-expected labor market report would increase doubts about a July rate cut from the Federal Reserve taking place. If the numbers exceed expectations, particularly significantly, it might reinforce confidence in economic recovery and reduce speculation about easing monetary policy.
“We anticipate cooling in job creation for the goods and government sectors, as well as for leisure & hospitality. The Unemployment Rate is expected to stay unaltered at 4.2% for a second consecutive month, while wage growth likely picked up to 0.3% m/m.” – TD Securities analysts
Should the Nonfarm Payrolls data disappoint with readings below 100,000, it could lead to a reevaluation among traders regarding future Fed rate cuts. In such a scenario, the U.S. dollar would likely come under massive downward pressure against all major currencies.
Implications for Currency Markets
The release of the Nonfarm Payrolls report is always a significant inflection point for currency markets. Robust U.S. labor market expansion tends to have the effect of pushing up the value of the dollar. This appreciation is bound to be most acute against the euro. Market analysts have identified key support thresholds for the EUR/USD currency pair. They marked these levels at 1.1300, 1.1250 and 1.1050 because of the intense reaction of the U.S. dollar.
Should the data disappoint, we could see EUR/USD finding topside resistance at 1.1500, 1.1575 and 1.1700. These levels will be significant hurdles for the currency pair to overcome. The performance of these currency pairs following the report will reflect traders’ assessments of economic conditions and future monetary policy directions.