NFP Preview: Bounce back likely after last month’s disappointing reading
Matt Weller, CFA, CMT June 3, 2021 4:04 PM
This month's report will be more significant than usual as the Fed watches employment and inflation closely as it evaluates when to start tapering its asset purchases
For traders and policymakers that were expecting strong growth of nearly 1M net new jobs, last month’s soft NFP report was an unexpected gut punch. As the graphic below shows, traders have tempered their optimism for this month’s report, which will be more significant than usual as the Fed watches employment and inflation closely as it evaluates when to start tapering its asset purchases:
Are these expectations justified? We dive into the key leading indicators for Friday’s critical jobs report below!
As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report:
- The ISM Non-Manufacturing PMI Employment component printed at 55.3, down more than 3% from last month’s 58.8 reading.
- The ISM Manufacturing PMI Employment component printed at 50.9, down more than 4% from last month’s 55.1 reading.
- The ADP Employment report came in at 978K net new jobs, a big improvement over last month’s downwardly-revised 654K reading.
- Finally, the 4-week moving average of initial unemployment claims fell to 428K, down sharply from last month’s 612K reading.
As we were reminded last month, the state of the US labor market remains more uncertain and volatile than usual as it emerges from the unprecedented disruption of the COVID pandemic. That said, weighing the data and our internal models, the leading indicators point to a roughly as-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 550k-650k range, albeit with a bigger band of uncertainty than ever given the current state of affairs.
Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which rose 0.7% m/m in April, will likely be just as important as the headline figure itself.
Potential NFP market reaction
The greenback dropped against most of its major rivals through the first half of May, largely as a result of last month’s disappointing NFP report, before stabilizing in the final couple of weeks.
USD/CAD is a pair that we highlighted last week as a candidate that could see a short-term rally on any positive US or negative Canadian data (note that the Canadian jobs report will be released at the same time as NFP).
Meanwhile, a weaker-than-anticipated jobs report could present a buy opportunity in GBP/USD, which has spent the last three weeks consolidating in a tight range below multi-year highs in the 1.4200 region. A fundamentally-driven breakout in the pair would confirm the longer-term uptrend and could be the catalyst for bulls to set their sights on the five-year highs in the mid-1.4300s.
How to trade with City Index
Follow these easy steps to start trading with City Index today:
- Open a City Index account, or log-in if you’re already a customer.
- Search for the market you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.