Why You Shouldn’t Miss This Month’s NFP
For Fed rate tracking purposes, the crucial report that stands out this week is today’s Non Farm Payrolls (NFP) release. This risks at least temporarily fouling up extended weekend holiday plans in US markets. Note that markets did not open on Thursday for Independence Day. There will be many traders in the US rolling the Thursday public holiday into a long weekend. This means that we may see some exaggerated price volatility around today’s NFP release as the liquidity is lower.
June payroll forecasts oscillate with estimates ranging from +100K to +200K and the median at +163K. Many market watchers prefer a forecast which is in line with the 3 months moving average of +151k. Yet they prefer it below the average of +175k over the past 6 months. Going forward, markets expect payroll gains to remain solid but look for the trend monthly increase to gradually decline as it becomes more difficult for businesses to find qualified workers due to tight labour markets.
Probabilistic Flash In The Pan
On the macro front, the biggest issue is whether nonfarm’s disappointment in May (+75k) was a flash or intensifying weakness. If it bounces higher today, then it would be partial evidence to give the Fed some breathing room; by corollary, another disappointment would likely spook the Fed. Statistically, according to Bloomberg data since 1970, nonfarm readings the month after a rise like May’s 75k or less resulted in an outright decline 54% of the time and by an increase of under 100k 17% of the time. Therefore, about 70% of the post-75k or fewer readings were similar or weaker.
Statistical Data Skews
However, the declines are skewed by recessionary periods. If the sample keeps close to what happens after months when nonfarm was 75k or less but still positive (i.e., less likely to be recessions), then the next print was an outright decline 22% of the time and a rise of under 100k 16% of the time. Therefore, barring fragile times, there is still a material 40% chance of another disappointing payrolls print.
Falling Trade Factor
One approach is to emphasize the above-described odds and what they say about such a disappointment as a harbinger of a softer trend. Two is that trade uncertainty roiled headlines particularly over the first half of the month on the path to the nonfarm reference period which is the pay period that includes the 12th of each month depending upon pay frequency. Trump’s Mexican stand-off probably disrupted hiring plans at the start of the month and dampened payrolls on the path to the reference period, and the latest round of tariffs on Chinese imports kicked in on June 1st. It would be more surprising to see the material upside to this number than downside.
Technical Take Away
From a technical perspective, the Dollar Index is testing the principal price pivot zone at 96.30 to 96.60. If the NFP data is strong this will likely be supportive of the Dollar. We could see a close above 96.60 which would be a bullish development. Bulls will then focus their attention on targeting a retest of initial upside resistance at 97.50. A weak NFP number will increase the probability of FED rate cut and will likely come out as Dollar bearish. This suggests that we would fail to recapture the price pivot zone, encouraging bearish views and likely setting up a retest of 95.30 to 95.10 next week. Remember lower market participation tomorrow in the US tomorrow provides the potential for some exaggerated price move around and in response to the release.