Will Non-Farm Payrolls Save the Dollar?
Over the past 2 months, foreign exchange traders have dumped dollars aggressively on fears that the slowdown in the U.S. economy will last longer than previously thought, forcing the Federal Reserve to increase monetary stimulus. The mere prospect of the U.S. central bank restarting their Quantitative Easing Program, has dealt a huge blow to confidence in the U.S. economy. However traders are holding out hope that Friday’s non-farm payrolls release will show strong private sector job growth, eliminating the need for immediate stimulus. As you can imagine, the outlook for the dollar as well as the market’s expectations for Tuesday’s FOMC announcement hinges upon Friday’s payrolls report. Although the U.S. economy is expected to report another month of net job losses and the unemployment rate is expected to rise due to a reduction in Census workers, U.S. companies should have continued to hire. In order to be a savior for the dollar, private payrolls would need to rise by more than 90k. Otherwise, the market’s fears about a slower recovery will be verified, giving traders a stronger reason to dump the dollar.
Since the government started to hire Census workers, foreign exchange traders have learned to look beneath the headlines because the net change in private sector payrolls is more important than the net change in non-farm payrolls, which is distorted by temporary government hiring and firings. Therefore even though non-farm payrolls are expected to fall by 65k, traders are going into the payrolls report with optimism because 90k private sector jobs are expected to be created in the month of July. However given the proximity of the private payrolls forecast to the prior month’s gain of 83k and the broad of range of estimates, the risk of a surprise on Friday is high. Of the 50 economists surveyed by Bloomberg, the most optimistic is calling for private payrolls to rise by 150k (Deutsche Bank) while the most pessimistic is calling for only a 30k gain (Standard Chartered Bank). With the net NFP forecast, economist estimates range from -160k to +10k.
What are Market Expectations?
Here are the forecasts for the July Non-Farm Payrolls Report:
Most Signs Point to Stronger Payrolls
Every month we attempt to predict the surprise of non-farm payrolls by taking a look at a hearty list of labor market reports that are released before NFPs. This month, most of the leading indicators that we follow for non-farm payrolls points to stronger private sector payrolls growth in the month of July. According to Challenger Grey and Christmas, planned layoffs declined by 57.2 percent last month which was more than the amount of layoffs planned for the month of June. Private sector payroll provider ADP also reported an increase of 42k private sector jobs in July compared to 19k the previous month. Considering that ADP undershot private payrolls 7 out of the last 10 months, there should have been a healthy gain in private sector jobs last month. However the U.S. government is still expected to have reduced the number of Census workers by approximately 150k, which will put net job growth at negative levels. The expansion in the service sector also accelerated last month with the non-manufacturing ISM index rising from 53.8 to 54.3. More importantly, the employment component of the report jumped above 50 which indicate that more companies in the U.S. are adding rather than reducing workers. Consumer confidence has deteriorated across the board, but that may be simply because the improvement in the labor market has been excruciatingly slow.
Arguments for Better Non-Farm Payrolls:
1. Employment Component of Service Sector ISM Back in Expansionary Territory
2. ADP Reports Larger Private Sector Payroll Growth
3. Challenger Reports Larger Decline in Planned Layoffs
4. Employment Component of Manufacturing Sector ISM Rises
5. 4-Week Average Claims Have Decreased
6. Continuing Claims Down from Prior Month
Arguments for Weaker Non-Farm Payrolls:
1. Census Job Reduction Could Account for as much as 150k jobs
2. University of Michigan Consumer Confidence Drops to Lowest Since November
3. Conference Board Consumer Confidence Falls to Lowest Since February
4. Monster.com Employment Index Drops 3 Points from June
How to Currencies and Equities Could React to Payrolls
Of the -65k job losses forecasted for July, 155k is expected to be government jobs. The private sector is expected to add 90k jobs. With those figures in mind, here are the possible reactions to the NFP report:
Scenario 1: Non-Farm Payrolls Turn Positive, Private Sector Payrolls Exceed 125k
The sticker shock of positive non-farm payrolls with strong additions in the private sector should trigger a sharp rally in the U.S. dollar. The market needs a surprise in both the headline and private sector numbers to reverse the dollar negative sentiment in the market. USD/JPY will have the cleanest reaction to this report but high beta currency pairs such as the AUD/USD and NZD/USD should also strengthen. The EUR/USD and GBP/USD could receive a boost from the improvement in risk appetite.
Scenario 2: Non Farm Payrolls Fall by 65k, Private Sector Payrolls Below 90K
If overall job growth meets expectations and private sector job growth misses, the impact on the dollar will depend upon the size of the disappointment. Private sector job growth of less than 50k would be very bearish for the U.S. dollar while job growth closer to 90k should only elicit a small reaction. Should the change in non-farm payrolls and private sector payrolls disappoint, the impact on the dollar would be far significant and would likely cause the greenback to sell off aggressively if the print is weak enough.
If private sector payrolls beat expectations and private sector payrolls miss, the private sector number would overshadow the net non-farm payrolls change. Finally, if both non-farm payrolls and private sector payrolls meet expectations, then it should be quiet day in the FX markets.
ADP versus Private NFP
ISM Employment versus NFP
The rise in the employment component of ISM signals stronger private sector payroll job growth
How to Trade Non-Farm Payrolls
The sticker shock of positive non-farm payrolls with strong additions in the private sector should trigger a sharp rally in the U.S. dollar. The market needs a surprise in both the headline and private sector numbers to reverse the dollar negative sentiment in the market. USD/JPY will have the cleanest reaction to this report but high beta currency pairs such as the AUD/USD and NZD/USD should also strengthen. The EUR/USD and GBP/USD could receive a boost from the improvement in risk appetite.
EUR/USD 5 Minute Chart: Intraday move following payrolls report in July:
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- Are Expectations for Non-Farm Payroll Too Frothy?
- ADP Numbers Create Suspicion About Non-Farm Payrolls
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