• Joel

USD at risk with NFP numbers tomorrow: here's what to expect

USD at risk with NFP numbers tomorrow: here's what to expect

The big moment of the week is here!

Tomorrow at 1330BST/0830EDT, we have the release of the latest official US employment numbers for July 2020.

The most important of these is the total numbers of jobs estimated to have been added (or lost from) the US economy in the month; the Non-Farm Payrolls number.

Markets are looking for a 1.6mln print, indicating that after April’s huge contraction in employment, the US jobs market will have rebounded solidly now for 3 months. As a reminder, NFP last month came in at a much better than expected 4.8mln, so this would still mark a solid deceleration in the rate at which jobs were added to the US economy.

However, following bad ADP National Employment data and ISM employment subindex data from earlier in the week, as well as two consecutive weekly rises in US jobless claims in the final two weeks of July, there are some concerns that this consensus for 1.6mln could be a little too optimistic.

EXPLAINER – ADP is a private payroll company who release a monthly estimate of the number of jobs added or lost from the US economy based on their own, inhouse data on the Wednesday before every Friday NFP number. ISM is the Institute of Supply Management, a company who collects data to create the most widely followed Purchasing Manager Index (PMI) data in the US – their data has subindices, including an employment component.

On Wednesday, ADP came in at 167k, well below estimates for 1.5mln. Meanwhile, the ISM Manufacturing and Non-Manufacturing employment sub-indices both had US unemployment still in contractionary territory in July (i.e. below 50).

It is not just the headline number that will be closely followed; so to will the unemployment rate (expected to drop to 10.5% from 11.1%), the underemployment rate (which was 18% last month) and the participation rate (which is at 61.5% at the moment, down about 2% since the onset of the pandemic).

In more normal times (i.e. of more gradual shifts in health of the US labour market rather than rapid deterioration followed by rapid improvement), average hourly earnings growth is closely followed, given that it is seen as a gauge of how “tight” the labour market is (if wages are going up faster, this signals a shortage of workers and could be a precursor for higher inflation). However, this number has not been being followed as much as of late.

Potential Market Reaction

If the number is much worse than expected, as some fear (i.e. as bad as ADP earlier in the week), this could trigger a negative reaction in risk assets such as US stocks and also likely USD – USD has not been trading quiet as much like a haven in recent weeks amid its big sell off, therefore I am inclined to think that bad US data would add further reason to be short USD.

Conversely, a good number is likely to be a big boost to risk appetite, and likely USD sentiment also. 


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