NFP Preview: Will Unemployment Break Back Below 10%?

See what the leading indicators are suggesting for Friday's Non-Farm Payrolls report and the potential trade opportunities that may emerge...


Seven months on from the initial US shutdowns, portions of the US labor market have returned to normal, especially for “white collar” employees who are able to work from home. In contrast, other areas of the labor market, including the hospitality, tourism, and restaurant sectors, remain deeply scarred. Throwing another spanner in the works, the massive fiscal stimulus from earlier in the year (highlighted by $600 in additional unemployment benefits) has worn off, and Congress has not yet reached an agreement on a new bill.

Such is the bifurcated state of affairs as traders look ahead to Friday’s always highly-anticipated Non-Farm Payrolls (NFP) report. As it stands, economists expect that it will show roughly 1.4M net new jobs, with wages flat on a month-over-month basis and unemployment expected to drop back below 10.0% for the first time since April.

Source: GAIN Capital

NFP Forecast

As regular readers know, there are four historically reliable leading indicators that we watch to help handicap each month’s NFP report:

  • The ISM Non-Manufacturing PMI Employment component ticked up to 47.9, up more than 5 points from last month’s 42.1 reading, but still signaling a slight decline in service sector employment.
  • The ISM Manufacturing PMI Employment component rose to 46.4, about a 2-point improvement from last month’s 44.3 reading, but still indicating a slight contraction in industrial jobs.
  • The ADP Employment report printed at “just” 428k, an improvement from last month’s upwardly revised 212k reading, but still well below the 1.25M reading economists were expecting.
  • The 4-week moving average of initial unemployment claims dipped to 992k, down from last month’s 1.34M reading (though it’s worth noting that there may have been some statistical distortions with the most recent release).

As we’ve noted repeatedly over the last few months, traders should take any forward-looking economic estimates with a massive grain of salt given the truly unparalleled global economic disruption as a result of COVID-19’s spread. That said, weighing the data and our internal models, the leading indicators point to a potentially worse-than-expected reading from the August NFP report, with headline job growth potentially rising by “just” 700k-1M jobs, though 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, will likely be just as important as the headline figure itself.

Potential Market Reaction

See wage and job growth scenarios, along with the potential bias for the U.S. dollar below:

Earnings < -0.1% m/m

Earnings -0.1% - 0.1% m/m

Earnings > 0.1% m/m

< 1.2M jobs

Bearish USD

Neutral USD

Slightly Bullish USD

1.2M-1.6M jobs

Slightly Bearish USD

Slightly Bullish USD

Bullish USD

> 1.6M jobs

Neutral USD

Bullish USD

Strongly Bullish USD

When it comes to the FX market, the elephant in the room is the US dollar. The greenback remains in the midst of a sharp downtrend against all of its major rivals, with the US dollar index recently dipping below 92.00 to its lowest level in over two years.

That said, selling pressure on the buck has moderated over the last couple weeks, and the world’s reserve currency may therefore see a countertrend rally if there’s any positive developments in this month’s jobs report. In particular, if we see stronger than expected jobs growth and wage figures, it could set up EUR/USD for a deeper retracement of the July rally back toward the 1.1700 zone, where the 50-day EMA comes in. Meanwhile, a weaker-than-anticipated NFP reading could create a sell opportunity in USD/JPY, which is not nearly as stretched as many of the other major currency pairs.

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