US Non-Farm Payroll: City Index model predicts a reading of 181k

Our proprietary model here at City Index is expecting a 181k reading in Friday’s US Non-Farm Payrolls report for May.

Our proprietary model here at City Index is expecting a 181k reading in Friday’s US Non-Farm Payrolls report for May. This is very close to consensus, with the market looking for a reading of 180k. The market is also looking for the unemployment rate to remain stable at 4.4% and for annual earnings data to inch up to 2.6% from 2.5% in April.

Dynamics of the model…

It is worth noting that due to the delayed release of the ISM non-manufacturing report, which won’t be released until after the NFP figure on Friday, we have substituted the employment component of the non-manufacturing ISM with the employment component of the manufacturing ISM instead. Some anecdotal arguments suggest that the manufacturing ISM has a closer relationship with payrolls, so I will test the accuracy of this claim and see how close the City Index estimate is with the actual data.

It does make sense that the traditional manufacturing sector has a closer relationship with payrolls, as jobs in this sector can be easier to measure. In contrast, it can be hard to measure jobs in the services sector due to the temporary nature of some of these jobs, remote working etc. We shall have to see if the addition of manufacturing sector employment improves the accuracy of our model.

Last month we had a similar prediction of 180k, which underestimated jobs growth by 31k. We were fairly happy with this, as it was an improvement on the accuracy of our model in March! We shall have to see if this latest tweak to the model delivers results.

A positive surprise could lift the dollar

Overall, there have been some positive surprises with some of our employment inputs for May, including a stronger than expected reading for the ADP report and an improvement in the ISM employment component for manufacturing. The 4-week moving average of initial jobless claims has also improved slightly and is currently at 238k, vs. 243k a month ago.

US economic data has been soggy of late and Citi’s US Economic Surprise Index had fallen to its lowest level since December 2015, although employment data had held up well. If we get another above consensus reading for payrolls then we would expect this to cement a rate hike from the Federal Reserve next week, which the Fed Funds Futures market is predicting with 95% probability. This could help to boost the dollar, which has been weak of late and has lagged the rally to fresh record highs in the S&P 500. While we doubt the consistency of the long-term relationship between a currency and a stock market, we still think that the dollar could play catch up if we get a 200k+ reading in payrolls next week.

USDJPY, which is sensitive to the US employment report, has managed to find a bottom in recent days ahead of the 200-day sma at 110.27. This is now a key support level, and we expect it to hold after a near 4% decline in USD/JPY since mid-May. We think that, on balance, there is more chance of recovery for USD/JPY, especially if we get a slightly higher than consensus reading for NFP, say of 200k or above. If this happens then a return to 112.30 – recent highs and the 100-day sma – could be on the cards in the short term.  We think a strong reading could also boost US stock indices on a broad basis, at least in the short term.

Chart 1: 

Source: City Index 

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