The question isn't about what headline print will be deemed as good or bad in the eyes of market participants
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Instead, it'll be about what headline print will be deemed as good or bad in the eyes of the Fed. Let's lay out the expectations ahead of the report first (gonna be a long-winded post this one, sorry about that heh):
- Non-farm payrolls +160k expected
- Prior +75k
- Average estimate +163k
- Highest estimate +220k
- Lowest estimate +100k
- Standard deviation 22.3k
- Unemployment rate 3.6% expected
- Prior 3.6%
- Participation rate 62.8% expected
- Prior 62.8%
- Average hourly earnings +0.3% m/m expected
- Prior +0.2%
- Average hourly earnings +3.2% y/y expected
- Prior +3.1%
In my view, as long as the unemployment rate and wages data continues to show signs of stability and steadiness, the headline print will matter little to the Fed ahead of their decision at the end of this month.
As such, even a reading between +50k to +100k should do little to warrant a 50 bps rate cut if the rest of the report isn't showing overwhelming signs of weakness in the labour market.
Sure, the knee-jerk reaction may prompt fears and see the dollar weaker but in the bigger picture, the unemployment rate is seen at its lowest since 1969 so shouldn't there be reasons to expect jobs growth to start slowing down anyway?
One argument is that there's been recent signs pointing to a slowdown in jobs growth related to manufacturing/goods production and that perhaps can be attributed to a global slowdown in the sector itself. However, I reckon there won't be a need to panic just yet even if this translates to further weakness in the data today.
But let's dig deeper into the data we had earlier this week to see if we can gather any perspective on what to expect.
The ADP employment showed a modest growth of +102k, the employment sub-component of the ISM manufacturing index rose slightly compared to that of May, while the employment sub-component of the ISM services index fell to its weakest level since 2017.
It's a bit of a mixed picture and there are certainly reasons to expect a softer reading later on but again, it'll come down to the rest of the report to lay out how this will affect the Fed's mindset going into their July meeting.
Given how markets are positioned based on Fed funds futures pricing, the risks to the report here is skewed towards the upside in the event that we see an overwhelmingly positive report. However, that is rather unlikely but you can never rule that out.
But if we see a more disappointing result as markets "want" to see, we should expect the dollar to weaken initially with gold and equities again likely to be the main beneficiaries as the focus will turn towards the Fed cutting rates again.
However, as mentioned above, unless other details in the report also point to a need for the Fed to exert more caution and take a massive step back, I reckon the knee-jerk reaction may not stay the course ahead of the FOMC meeting this month.
