By Dean Popplewell
A strong U.S. jobs report today could set the tone for a dollar revival this month.
Year to date, the buck’s overall weakness would suggest that many of the speculative “long” dollar positions, built mostly on rate differentials, are now much lighter. If so, this would indicate that market conditions are favorable for a data-led ‘big’ dollar correction.
After this week’s early dollar meltdown, the USD comes into this morning’s job release broadly higher against most major developed currencies, while underperforming against emerging market pairs.
What to expect with non-farm payroll (NFP)?
Already this week’s jobs indicative reports could suggest a surprise in today’s release. Yesterday’s U.S. weekly claims data (+274k vs. +260ke - biggest gain in 12 months) and April’s Challenger job cuts print (+65.1k vs. +48.2k - ytd layoffs the highest in seven years) both saw surprising increases.
Combine them with Tuesday’s ADP data (+156k vs. +196ke) and the numbers signal a possible deceleration in the U.S. job market. But will we see that reflected in today’s release?
It’s not all doom and gloom on the job front for this week. The market did see an improvement in the employment component of the ISM non-manufacturing survey released on Wednesday.
So, what should the investor be focusing on in today’s NFP?
Investors and dealers typically would be searching for clues for any re-pricing of Fed policy expectations. Recent Fed rhetoric has squashed U.S. rate normalization occurring any time soon. To date, the market is pricing in only one rate hike and that’s in December, a far cry from the Fed’s original four dot proposal at the beginning of this year.
Dollar bulls require a U.S. jobs report to show healthy job additions, higher wage growth and a labor participation rate showing some traction. However, with the U.S. consistently ticking the job growth box for the past year, the market has naturally shifted its focus to wage growth. To date, the U.S.’ impressive growth in jobs has generally not translated to meaningfully higher wages, at least until now. Any improvement in pay, along with a gradual recovery in the labor participation rate, is expected to lead to higher consumption.
The U.S. still needs to move the needle on wages. Average hourly earnings need to show a monthly gain of +0.2% and then some. Anything on the “positive” side will have fixed-income dealers repricing current yield curves.
With non-farm payroll ticking, or partially ticking off the first two requirements, the investor’s primary focus should shift to labor-force participation.
The U.S. participation rate continues to hover near its historical lows – 62.6%. It’s healthy to see it edge higher even if it does happen to push the unemployment rate up (+5.0%). It would be considered a positive indicator of a healthier U.S. economy.
If all the “stars” align, we should expect the gradual rate normalization message that the Fed seems to have muddled since last December's rate hike be back on the table.
When it comes to today’s report, do not just look at the headline print – the details and backwardation is just as important.
An NFP with a headline print of +200k or more will indicate that the Fed does not need to worry too much about the U.S.’ labor market conditions just yet. A ‘big’ miss either side of expectations will only heighten market volatility. Anything close to expectations should be dollar positive now that positions have been pared.
Despite this week's job indicator misses, the market consensus is looking for a headline print of +210k and an unemployment rate to fall to +4.9%. Due to the positive calendar effects, many analysts are expecting average hourly earnings to tick up +0.3% on the month.
Robust data will obviously favor the dollar – further support for the EUR, GBP or JPY will come from a much weaker headline or deeper revisions.