August NFP report to test US labor market strength after July shock

VaselineSeptember 6, 2024

0 5 minutes read

August NFP report to test US labor market strength after July shock

U.S. nonfarm payrolls are expected to rise by 160,000 in August, after gaining just 114,000 in July.
The US Bureau of Labor Statistics will release its critical jobs report at 12:30 GMT on Friday.
Employment data could help gauge the size of the Fed’s interest rate cut in September, jolting the US dollar.

The US Bureau of Labor Statistics (BLS) will release the highly anticipated non-farm payrolls (NFP) data for August at 12:30 GMT on Friday.

US labor market data holds the key for markets to gauge the size of the US Federal Reserve’s (Fed) expected interest rate cut in September, increasing volatility around the US dollar (USD).

What to expect in the next nonfarm payrolls report?

The Nonfarm Payrolls report is forecast to show the US economy added 160,000 jobs in August, after creating 114,000 in July.

The unemployment rate is likely to fall to 4.2% over the same period, from 4.3% in July. Meanwhile, a careful measure of wage inflation, Average Hourly Earnings, is seen rising 3.7% in the year to August, after rising 3.6% in July.

August employment data will provide meaningful insights into the strength of the US labor market, which are key to shaping the Fed’s interest rate outlook at its September 17-18 policy meeting and beyond.

Fed Chairman Jerome Powell indicated in his opening remarks at the Jackson Hole Symposium last month that an “unwelcome cooling of the labor market” could justify more aggressive policy action, favoring a 50-point interest rate cut base rate (bps).

The Fed, meanwhile, amended its July policy statement to note that it is “watchful of risks to both sides of its dual mandate,” rather than previously noting only its focus on inflation risks.

Previewing the August labor force report, TD Securities analysts said: “We expect US payrolls to return north of the 200,000 mark in August after July’s downward surprise. The EU rate probably fell by a tenth to 4.2%, with wages rising by 0.3% month on month.

How will August US non-farm payrolls affect EUR/USD?

The US dollar (USD) resumed its downward momentum against its main rivals, sending the EUR/USD pair back towards the 1.1100 mark. Will US NFP report double down on dovish Fed expectations, lifting EUR/USD at the expense of the USD?

Ahead of the US NFP showdown, weak Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) data raised concerns of a potential “hard landing” for the US economy amid fresh signs of weakness of labor market conditions.

The ISM said on Tuesday that the US manufacturing index improved slightly to 47.2 in August from 46.8 in July, but remained in contraction, below the expected level of 47.5. Data on Wednesday showed that US job openings fell to a 3½-year low in July to 7.67 million, following June’s 7.91 million openings, while below the expected 8, 1 million. Automatic Data Processing (ADP) reported on Thursday that US private sector employment rose by 99,000 jobs in August, after rising by a downwardly revised 111,000 in July.

Dismal US economic data has accelerated bets for a 50 bps interest rate cut by the Fed at its September meeting. Markets are now pricing in a 47% chance of a 50bps rate cut by the Fed later this month, up from 31% earlier this week, according to CME Group’s FedWatch tool.

If the headline NFP figure surprises with payrolls rising below 100,000, it could increase the chances of a big cut in September, exacerbating the pain in the US dollar while pushing EUR/USD further north. Conversely, a strong NFP print combined with hot wage inflation data would throw cold water on the Fed’s aggressive rate cut outlook for this month, raising hopes that the Fed could opt for a more modest 25 bps rate cut . This could fuel a decent USD rally, consolidating EUR/USD’s fresh sell-off towards 1.0900.

FXStreet analyst Dhwani Mehta provides a brief technical outlook for EUR/USD:

“The EUR/USD is defending the 21-day simple moving average (SMA) at 1.1061, after recapturing it on Wednesday. The 14-day Relative Strength Index (RSI) is pointing north well above the 50 level, currently near 58, suggesting that buyers are likely to remain in charge for the foreseeable future.”

“Buyers need to break the year-to-date high of 1.1202 last month to accept the psychological barrier of 1.1250. Above, the July 18, 2023 high of 1.1276 will trigger bearish commitments. Alternatively, support below the 21-day SMA at 1.1061 is critical for a sustained correction. The next healthy support levels are seen at the round figure of 1.1000 and 50-day SMA at 1.0939,” adds Dhwani.

Economic indicator

Non-agricultural payment establishments

The Nonfarm Payrolls release shows the number of new jobs created in the US during the previous month in all nonfarm businesses; is published by the US Bureau of Labor Statistics (BLS). Monthly payroll changes can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex chart. Generally, a high reading is seen as bullish for the US dollar (USD), while a low reading is seen as bearish, although reviews of previous months and the unemployment rate are just as relevant as the headline figure. Therefore, the market’s reaction depends on how the market evaluates all the data contained in the BLS report as a whole.

Non-farm payroll FAQs

Non-farm payrolls (NFP) are part of the US Bureau of Labor Statistics’ monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US over the previous month, excluding the agricultural industry.

The nonfarm payrolls figure can influence the Federal Reserve’s decisions, providing a measure of how successfully the Fed is meeting its mandate to promote full employment and 2 percent inflation. A relatively high NFP figure means more people are employed, earning more money and therefore likely spending more. A relatively low Non-Farm Payrolls result, on the one hand, could mean people are struggling to find work. Typically, the Fed will raise interest rates to combat high inflation fueled by low unemployment and cut them to stimulate a stagnant labor market.

Non-farm payrolls generally have a positive correlation with the US dollar. This means that when wage numbers come out higher than expected, the USD tends to rise and vice versa when they are lower. NPFs influence the US dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be tighter in its monetary policy, supporting the USD.

Non-farm payrolls are generally negatively correlated with the price of gold. This means that a higher than expected wage figure will have a depressing effect on the price of gold and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities, gold is priced in US dollars. If the USD gains in value, therefore, fewer dollars are needed to buy an ounce of gold. Also, higher interest rates (typically helped higher NFPs) also diminish the attractiveness of gold as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm payrolls are only one component of a larger jobs report and can be overshadowed by the other components. Sometimes when NFP comes in higher than forecast but average weekly earnings are lower than expected, the market has ignored the potentially inflationary effect of the headline and interpreted the earnings decline as deflationary. The Participation Rate and Average Weekly Hours components can also influence market reaction, but only in rare cases such as the Great Recession or the Global Financial Crisis.

VaselineSeptember 6, 2024

0 5 minutes read