After a volatile week, the US dollar had a strong session on Thursday as investors reacted to positive data from the world’s largest economy, while US stocks managed to recover from earlier weakness. Private sector payrolls report from the ADP topped expectations, as too did the weekly jobless claims and the ISM services PMI numbers. Investors sold gold and exchanged currencies where the central bank is considered to be very dovish, such as the euro and yen, for the dollar. Judging by the greenback’s out-sized gains on Thursday, it now looks like the market is positioning itself for a stronger non-farm payrolls report than what the economists are expecting. The key question now is, how will the markets react on Friday?
How will the markets react?
Don’t forget that the focus will be both on employment and wages, given the Fed’s dual mandates.
- Dollar: The key consideration to take into account ahead of the publication of the jobs report is whether a strong set of numbers are now priced in, which means we may not necessarily see further significant upside if NFP does beat expectations on Friday. However, if we see a very strong report then the dollar shorts will undoubtedly be squeezed further. It is also worth remembering that with the dollar’s underlying trend being bearish, the recovery may well stall ahead of the jobs report. Given Thursday’s outsized move and the potential for profit-taking, don’t be shocked if the greenback is slapped back down during the Asian session overnight, or early European session on Friday.
- Stocks: What the stock markets want to see is a steady improvement in jobs, not too hot to raise inflation and policy tightening concerns, yet not too soft to raise doubts about the recovery. The goldilocks scenario for equities would be something around the expected figure or lower. However, if we see a number north of 1 million, this would probably raise those fears, potentially leading to a drop in equity prices.
- 645K is the expected figure for the headline non-farm jobs growth for the month of May – if correct, this would represent a sharp improvement from last month’s disappointing 266K print (when 1m was expected)
- 5.9% is expected for the unemployment rate, which would be the lowest since April last year
- 0.2% is how much wages are expected to have grown last month, following a 0.7% m/m rise the months before
NFP leading indicators
In order to gauge how strong or otherwise the May nonfarm payrolls will be, we usually look at the below leading indicators:
- ISM Non-Manufacturing PMI Employment component 55.3 vs. 58.8 last (negative)
- ISM Manufacturing PMI Employment component 50.9 vs. 55.1 (negative)
- ADP Employment report 978K vs. vs 654K last and 645L expected (positive)
- 4-week moving average of initial unemployment claims 428K vs. 612K last month (positive)
Overall, the pre-NFP leading indicators have been mixed. Most notably, the ISM employment component for the dominant services sector suggests employment was not too strong in May. This may mean we will see another disappointing NPP headline on Friday, which could send the dollar back lower and potentially keep the stock markets supported.
NFP Preview webinar
Don’t forget to join us for the NFP preview webinar on Friday, starting at 11:30 London time. You can register HERE
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