Nonfarm Payrolls Preview: Fed’s policy shift to introduce vital noise

The US economy is expected to have added 1.4 million jobs in August.
The Federal Reserve made a monetary policy shift, giving employment more relevance.
USD is heading into the release giving up some ground, but still the strongest across the FX board.

Is time again for the US to publish its monthly employment report. The country is expected to have recovered another 1.4 million jobs in August, after adding 1.76 million in July. The unemployment rate is expected to tick down to 9.8% from the latest 10.25, while the participation rate is seen steady at 61.4%. Average Hourly Earnings, however, are expected to remain flat in the month and are foreseen at 4.5% when compared to a year earlier.

Employment, inflation and the Fed

Over 40 million Americans lost their jobs between March and April, and less than half of those have returned to work. According to the US Labor Department, roughly 27 million people are still receiving some form of unemployment insurance. If the country keeps recovering jobs at an average pace of 1.5 million jobs per month, it will take 18 months for the US to complete the recovery. That falls in the first quarter of 2022.

Just last week, the head of the US Federal Reserve, Jerome Powell, announced a shift in the monetary policy approach. Not only the central bank will leave inflation to fluctuate beyond 2.0% without that meaning a rate change, but also lifted the relevance of the employment factor in future decisions. “Maximum employment is a broad-based and inclusive goal,” Powell said. Anyway, Powell made it clear that the central bank won’t move rates for a long, long time.

The impact of the Nonfarm Payroll report has been decreasing for a couple of years, as the focus was put on inflation. The employment sector had been doing pretty well before the pandemic put everything upside down. Now, that US policymakers changed their focus, there’s a chance that employment data have a larger effect on the greenback. However, it still could happen that, given that the Fed won’t raise rates in the foreseeable future, investors will continue to move beyond the NFP report.

Leading indicators

Ahead of the Nonfarm Payroll report, data hints have not been that encouraging. The ADP survey showed that the private sector added 428K new positions in August, more than doubling the 212K added in July, although far below the 950K expected.

The latest Initial Jobless Claims weekly report posted a nice improvement by falling to 881K, but when it comes to the Nonfarm Payroll report, it does not include data beyond the 20^th of the previous month. On the contrary, it collected that back from when unemployment claims jumped back above 1 million.

Consumer confidence is another negative factor as the Michigan index remains stuck at lows while the CB index fell to 84.8 in August, an over five-year low.

There are more good news than bad news. The employment sub-component in the US ISM Manufacturing PMI report kept recovering, printing a better-than-expected 46.4 number in August. The sub-component within the ISM Service PMI also improved from 42.1 in July to 47.9.

Also, and according to Challenger, the number of corporate layoffs fell to 115K in August, the lowest figure since the pandemic outbreak, while the latest JOLTS Job Openings report shows that hiring increased by 5.88 million in June.

US jobs report pre-release checklist – Sep 4th, 2020

Previous Non-Farm Payrolls	Positive	The US economy added 1.76M jobs in July, a better-than-expected figure, although the ytd job-loss number is still around 13M.
Challenger Job Cuts	Positive	The number of corporate layoffs fell to 115K in August, the lowest figure since the pandemic outbreak.
Initial Jobless Claims	Negative	First-time employment claims have picked up the last couple of weeks, back over 1 million.
Continuing Jobless Claims	Negative	The number of unemployment benefit receivers is falling at a painfully slow rate, still above 14.5 million.
ISM Services PMI	Positive	The employment sub-index in the US main services survey jumped over 5 points in August, continuing its recovery but still in contraction territory (47.9).
ISM Manufacturing PMI	Positive	Employment sub-component in the US flagship manufacturing survey keeps recovering, printing a better-than-expected 46.4 number in August.
University of Michigan Consumer Confidence Index	Neutral	The UMich consumer sentiment survey is failing to pick up, stuck in the low 70s since the pandemic struck.
Conference Board Consumer Confidence Index	Negative	The Conference Board Consumer Confidence Index® further decreased in August to 84.8, the lowest level in more than five years.
ADP Employment Report	Negative	Private sector employment just increased by 428K jobs in September, a very modest number compared to 950K expectations.
JOLTS Job Openings	Positive	The number of hires was back on track on June, increasing to 5.88M, showing some pick up after curfew ended in several states. This is still a lagging indicator, though.

Dollar’s possible reaction to different scenarios

The American currency heads into the release of the monthly employment report giving up some of the ground gained this week, but overall strong. Upbeat numbers could boost the greenback, given its own momentum, despite it could also boost equities. A disappointing outcome, on the other hand, will be quite shocking at this point and spur some profit-taking ahead of the weekend.

As usual, GBP/USD could be the less interest pair to trade with this event, while USD/CAD would be the riskiest, as Canada will also publish monthly employment data.

The EUR and the JPY are the most vulnerable in the case of a strengthening dollar, while the AUD/USD pair will tend to follow equities.

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