Based on the rally in the US dollar today, investors are betting on a strong jobs report. The greenback ended the day sharply higher against the Japanese Yen and Swiss Franc while recovering its losses against other major currencies. Non-farm payrolls are scheduled for release tomorrow and economists are looking for job growth to ease slightly to 160K from 164K the previous month. Investors on the other hand are hoping that job growth will be closer to 200K. Their optimism comes after ADP reported the largest increase in private sector jobs in 4 months. Jobless claims also remained low while job cuts eased according to Challenger, which suggests that non-farm payrolls increased in August.
Yet there are 5 good reasons why the jobs report could disappoint. According to today's ISM non-manufacturing report, service sector activity rebounded in the month of August, which is great news because services represent a big part of the economy. Unfortunately the employment component of the report fell to its lowest level in more than 2 years, which is a problem because this subcomponent of non-manufacturing ISM has the strongest correlation with NFPs. Additionally, the manufacturing sector reported the weakest employment index in 3 years, the 4 week moving average of jobless increased slightly and confidence declined across the board. Challenger reported fewer layoffs, but companies are still shedding workers. With global growth slowing and the US at risk of recession, US companies have many reasons to delay hiring.
USD/JPY ended the NY session not far from 107. If payrolls rise by 150K or less, the pair could sink back down to 106 as traders position for easing by the Fed later this month. Alternatively, if payrolls rise by 180K or more, USD/JPY should extend its gains above 107.50. Average hourly earnings and the unemployment rate are just as important as non-farm payrolls - for a sustainable move in the greenback, we need to see stronger job growth supported by steady earnings or weaker job growth exacerbated by lower wages. With the ECB expected to ease next month, EUR/USD would probably be hurt the most by a good US jobs report. On the other hand, if the data is weak AUD/USD could also be an attractive long.
Arguments in Favor of Stronger Payrolls
- Challenger reports 39% increase in layoffs compared to 43.2% the previous month
- ADP rises to 195K vs. 142K the previous month
- Continuing Claims drops to 1.66M from 1.72M
Arguments in Favor of Weaker Payrolls
- Employment component of services ISM weakest since March 2017
- Employment component of manufacturing ISM weakest since March 2016
- 4 Week Moving Average rises to 216K from 212K
- University of Michigan Consumer Sentiment index falls most since 2012
- Conference Board index slips slightly to 135.1 from 135.8
Canadian employment numbers will be released alongside NFPs, which means big moves are in store for USD/CAD. The Bank of Canada left monetary policy unchanged earlier this month and contrary to expectations, pointed to strength in parts of the economy. Wages in particular picked up which could be indicative of ongoing strength in the labor market. USD/CAD traded sharply lower in response but bounced off its lows on Thursday. Investors find it hard to believe that Canada's economy is doing well when growth is slowing across the globe so if tomorrow's Canadian labor market disappoints, we could see a sharp recovery in USD/CAD. With that said, Canada lost jobs for 2 months in a row so job growth is expected for August. A good number that reinforces the BoC's optimism would drive CAD sharply higher but in this case, the crosses may be more attractive because USD/CAD will react to NFPs first.