Non-Farm Payrolls preview: Watching wages, USD well positioned to ride higher

• The NFP report focuses on wages and not for the first time.
• The US Dollar is well-positioned to take advantage of an uptick.
• Only a catastrophic report can cause second-thoughts for a September rate hike.

The US publishes its jobs report, the Non-Farm Employment Change, on Friday, August 3rd, at 12:30 GMT. The first Friday of the month features the all-important jobs report which some now call the wages report. For over a year, the change in the Average Hourly Earnings determines the reaction of the markets.

Why wages matter

The US economy is getting close to full employment. Even though participation is below pre-crisis levels, the unemployment rate is at an enviable 4%. According to basic economics, a low supply of new workers should push pay higher as employers are competing for employees.

Wage growth is only marginally higher than it used to be, with annual earnings up by 2.7% in the latest figure for June. There are various explanations for the phenomenon, such as a lower rate of unionization, a higher rate of incarceration, the opioid epidemic, and other issues. 

Lower salaries result in lower inflation and a slower pace of rate hikes, and this already shakes markets. The Fed has a dual mandate of full employment and price stability, with the latter falling short. 

Expectations and potential reactions

Annual Average Hourly Earnings are expected to remain at the same pace of 2.7%. An increase to 2.8% or higher would boost the US Dollar regardless of any other figure. A drop to 2.6% would weigh on it, also irrespective of the other data points.

On a monthly level, an increase of 0.3% is expected to come in July after a disappointing advance of 0.2% in June. The monthly change is set to play a more prominent role if the annual number meets expectations. 

If wages come out fully meet expectations on a yearly and monthly basis, the focus will entirely shift to headline jobs.

The topline change in jobs has been quite stable of late but still matters. After topping 200,000 in June with a healthy rise of 213,000, a more modest increase of 190,000 is on the cards. The average for the past six, 12, and 24 months has been around these numbers. A minor beat could be seen after the ADP Non-Farm Payrolls report for the private sector came out above expectations. However, realistic expectations are probably not very different from the consensus. 

For the employment change to have a significant impact of its own, it would need to provide a considerable surprise. A leap of 250,00 jobs or more would be USD-positive while a disappointing increase of 150,000 or fewer positions would weigh on the greenback. 

Significant revisions to June and May can also play a part, but they also need to be in the magnitude of at least 50,000 jobs, given past market reactions. 

The unemployment rate is forecast to drop from 4% to 3.9%, a level that it had already visited this year. The jobless rate depends heavily on participation which also carries expectations for ticking up from 62.9% to 63%. The impact will likely be minimal. 

The "real unemployment rate," U-6, will be eyed for long-term trends but is unlikely to move markets too much in the immediate aftermath. The same goes for the Average Weekly Hours which have been stable at 34.5.

USD well-positioned

The US Dollar enjoyed a fresh summer breeze at the beginning of August. The Fed has slightly tweaked up its wording on the economy, higher 10-year yields create higher demand, and the fresh escalation in the trade tensions with China is also positive for the greenback. One exception is USD/JPY, which dances to the flutes of stock markets. But against the Euro, the Pound, and also vis a vis commodity currencies, the American currency is well positioned.

With a bullish bias, it would not take too much to lift the greenback further. As mentioned earlier, 2.8% annual wage growth should do the job.

A disappointment can send the dollar lower, but will unlikely alter the broader picture and the Fed's intentions to raise rates in September. Perhaps a drop in wages below 2.5% and job gains of below 100,000 could cause a rethink, but this scenario is highly unlikely.

Conclusion

All in all, the focus is on wages with jobs playing second fiddle. The environment is USD-friendly with a small beat being sufficient to extend the greenback's gains.

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