Summary:
- ISM employment metrics suggest softer NFP
- Wage growth most relevant for the USD
- ADP and NFP quite closely correlated of late
- USDJPY nears crucial support area
The US employment report draws most of market attention each month. It will be similarly today where the official consensus indicates that employers could have added 180k new jobs in July compared with 222k seen last month. However, an employment change is not so important on its own, market participants will pay a close attention to wage growth which remains crucial with regard to inflation trends in the US economy, not just there though.
Both manufacturing and non-manufacturing ISMs suggest a softer reading of the NFP in July but above 200k. Source: Bloomberg
First and foremost, let’s have a look at a few metrics which could come in handy when we try to predict a change in employment. On the face of it, the manufacturing as well as non-manufacturing ISMs do not bode so well as both marked perceptible declines last month. What it’s worth underlining, the non-manufacturing gauge is by far more correlated to the NFP report, hence there is almost no space for a rise in the NFP much above 220k.
From that standpoint, an increase beyond 220k could see the USD rebounding instantly on a headline. Nevertheless, when the dust settles investors are likely to read between the lines trying to pull out details which could prove to be the most meaningful for the US dollar. Besides an employment change and wage growth, there will be two noteworthy releases such as jobless rate and labor force participation rate. The former is expected to come in at 4.3% and even as the US labor market is already supposed to be at full employment, investors could look for yet lower rates to come. Taking into account a short-term horizon a jobless rate could decline below the neutral one (the NAIRU), however it tends to level off at or slightly above that rate.
Slowing inflation indicates continued subdued wage growth going forward. Source: Bloomberg
Moving on to wages, there is no doubt that the latest inflation report was not as strong as the FED would have wished. That said, much lower inflation is unlikely given rising expectations regarding global growth outlook, hence if so, wage growth could have already bottomed out. That scenario could be decisively conducive to the greenback. Wage growth is anticipated to show rises a 2.4% and 0.3% in a yearly and monthly basis respectively.
ADP indicates a softer NFP reading in July, one standard deviation has not been struck as of yet though. Source: Bloomberg
Finally, the ADP reported a rise in employment by 178k which was more or less in line with expectations. Weighing ADP against NFP there could be noticed quite a notable correlation over the course of recent months which might foretell not a spectacular increase reported by the BLS for July later in the day. That said, despite a last month’s rise in employment a one standard deviation has not been achieved so far which could give yet more room to expand before a retreat. From that point of view, an increase above 250k could prove to be an upbeat surprise, therefore the US dollar could gain a foothold in the aftermath barring any disillusion in wages.
The USDJPY is nearing a crucial support line which has served as a springboard for bulls so far. Source: xStation5
Technically, the USDJPY could be the most noteworthy currency pair today. The price has been going down recently after marking a peak at 114.3. It’s worth stressing that the pair drew two bearish engulfing candlesticks each time when a resistance was tested. For that reason, until bulls break 111 to the upside, larger upward moves are unlikely to occur.
On the other hand, if today’s report disappoints, it could lead to a test of a critical support zone placed in the vicinity of 109.3 which is underpinned by a medium-term trend line along with a 50% retracement of a recent upward move. At the end of the day, one could conclude that that level is the last resort for bulls if they want to retain a bullish trend in place.