By Alfonso Esparza
Though the monthly U.S. jobs reports typically garner much attention, investors are keen to see the nonfarm payrolls (NFP) data for August on Friday as it could have a significant impact on the Federal Reserve's easy-money policies.
The Fed is close to ending its bond-buying program and officials are monitoring the U.S. Labor Department's jobs data in order to make an interest rate hike decision as early as spring 2015.
The NFP disappointed last month with lower-than-expected numbers causing the USD to retreat versus gold and the EUR. At that time, expectations were high for a strong NFP given the positive gross domestic product (GDP) numbers the U.S. produced in the second quarter after an abysmal first quarter that was marred by a harsh winter. The American economy was expected to have thawed out, but the lower employment numbers indicated there was still some frost on the economy.
Private Business Hiring Slows
Because of the Fed's use of forward guidance, much emphasis was put on employment recovery. The most significant metric was said to be the employment rate, but with its rapid recovery, the Fed was forced to diversify as the flawed metric does not take the labor participation rate into consideration. Thus, a new dashboard was presented by the Fed during Chair Janet Yellen's introduction as the world's most powerful central banker.
Meanwhile, hiring in the U.S. private business sector slowed down in August. ADP's national employment report showed 204,000 new jobs were created last month. The number is slightly less than forecast (approximately 215,000). The ADP report also introduced a lower revision to the July figures to 212,000 from 218,000. It is worth mentioning that about a third of the new hires were attributed to small to mid-sized enterprises.
Unemployment claims were up slightly but the seasonally adjusted average still points to a recovery. The four-week average remains above 300,000. However, the results of this leading indicator will factor in next month's NFP report.
The Buck Gets a Boost
This week has been a positive one for the USD. No changes from the central banks of England and Japan, and a cut from the European Central Bank has boosted the dollar against a basket of currencies.
A strong NFP report on Friday can solidify the gains of the week as a sign of economic recovery. A new jobs figure above 220,000 could instill confidence even if it comes slightly below expectations. Missed expectations under 200,000 would have a negative effect on the dollar. The market consensus was tabulated around 230,000 while the actual NFP tally for July was 209,000. In any event, it was not enough to discourage traders to move away from believing in the U.S. jobs market recovery, but it did put into question the Fed's next move in a week that had lower corporate earnings for investors to digest.
The June NFP report is a perfect example of market reaction to a number crushing expectations. Given the lack of GDP data, and a sub-300,000 figure in the May NFP report, the 298,000 jobs print boosted the USD. The rise in job creation drove the unemployment rate to 6.1%. Looking back, the NFP was already heralding a better-than-expected second-quarter GDP.
Bullish Expectations Abound
The market consensus is for Friday's NFP is the U.S. added 225,000 in August. This would mark the seventh time the report has printed above 200,000, another sign that the U.S. economy is strengthening. American economic data has been positive for the most part with purchasing managers' indexes and the Institute for Supply Management's manufacturing data delivering no visible change to the employment component.
Analysts are mostly bullish on the NFP being well above 200,000 with the optimistic crowd expecting a figure in the 300,000 range. Given the uncertainty in the market, and the questions introduced this week by central banks, the NFP could lift the USD higher versus major pairs if it performs close to and above expectations. While unlikely, that scenario could trigger more forex market volatility. On the other hand, a failure to break above 200,000 could initiate furious selloffs.
As for next week, there are fewer high impact data releases but the Reserve Bank of New Zealand will make an interest rate announcement, a U.K. inflation report, a Chinese consumer-price index, and U.S. retail sales data will be the main focal points.