The U.S. employment situation improved considerably in June to reach 195,000, and saw upward revisions for the month of April and May. However, the key number - the percentage unemployment, remained at 7.5%. The July figures are expected to add 185,000 jobs. The Fed's gradual exit of its quantitative easing program depends on the improvement in the unemployment situation and the target inflation rate of 2%. Although, numerous factors challenge the Fed's monetary policy goals to achieve the economic growth, good employment numbers in July will definitely help ease other areas of concern. The second-quarter GDP came above expectations - 1.7% against the expected 1%. However, the positive second-quarter figures when compared with the first quarter GDP - which was revised down from 1.8% to 1.1%, yields a net effect of a weaker economic growth.
The Fed, during the July FOMC press conference, mentioned it has downgraded its assessment of economic growth and described the economy as "expanding only at a modest pace." The drop in July consumer confidence, keeping the inflation levels persistently below its 2% target, and the rise in U.S. mortgage rates to a 2-year high from the lows of 3.4% in April, have also been under the Fed's watch, during the July FOMC meeting. Existing home sales had declined to -1.2% in June on the back of the tapering talks and rising mortgage rates, which is a great threat to the economic recovery.
Consequently, the Fed will pay close attention to the July payroll figures to assess how it would impact other economic variables, and apply these results on the monetary policy strategies, whether it should allow more time or not until it scales its $85 billion monthly asset purchase program.
Below is the consensus forecast for the employment situation for the month of July 2013.
Non-farm payrolls: 185k
(June - 195k)
Unemployment rate: 7.5%
(June - 7.6%)
There are two possible outcomes investors should be prepared for, when placing their trades.
1. July Payroll figures come well below the estimates with the unemployment rate unchanged at 7.6%:
If the July payroll figures come well below the estimated 185k, we may see the dollar nosedive. The U.S stock market reaction in a normal scenario for a disappointing payroll data would be a total sell-off. However, in this instance, investors may believe the disappointing data could delay the Federal Reserves' stimulus unwinding strategy, given the Fed has already downgraded its assessment for economic growth. Consequently, the stock markets may hold on to their gains, but volatility should always be expected when the employment figures are below estimates.
2. Better-than-estimated July Payroll figures with the unemployment rate falling to 7.5%:
This scenario is what is going to be a tricky situation for investors. Although this situation is bullish for the economy, the fact that Fed could lay out the stimulus exit plan due to the upbeat data, could very well drag the markets down .
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.