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RESEARCH NOTE: July US Employment Preview
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
(Thursday, July 31, 2008) We expect the headline NFP report to match consensus expectations of a -75K job loss, but look for the unemployment rate to increase to 5.7%, more than the market's expected increase to 5.6% from 5.5%. Perhaps counter-intuitively, we view such a NFP report as an opportunity to buy the USD on any data-induced weakness. A triple digit negative headline NFP reading coupled with a higher than expected unemployment rate would negate this outlook. The risk is that seasonal factors over-compensate and a better than expected headline NFP reading appears, limiting the initial USD-negative reaction.
Trading Strategy:
- We look to sell EUR/USD on strength into the 1.5680/1.5730 area; stop 1.5780
- We look to sell GBP/USD on strength into the 1.9900/1.9950 area; stop 2.0010
- We look to buy USD/CHF on weakness into the 1.0370/1.0420 area; stop 1.0315
Data Analysis:
Headline NFP job change: The July ADP national employment report surprised with an unexpected increase of +9K versus forecasts of -60K. For the year to date, the ADP report has been underestimating the amount of jobs lost in the NFP report by an average of +84K. Extrapolating from the admittedly dubious ADP report (which has actually tracked closer to actual NFP in recent months, leaving the risks skewed to a better NFP headline) results in a NFP reading of -75K, which is exactly the Street and our expectation. Today's weekly jobless claims data saw the 4-week moving average increase to 393K from 382K, an indication of a weak labor market, but not necessarily a rapidly deteriorating one. Also, July weekly jobless claims are heavily adjusted for seasonal factors and this week's higher number would not cover the NFP survey period, both pointing to a better skew (fewer jobs lost) to the headline NFP number. In general, the declines in employment in the current US downturn have been milder than in previous US declines and we think this will remain the case. Keep in mind that employment is a lagging indicator of the state of the economy. Monthly NFP declines in the 2Q were less (avg. of -63.6K/month) than those in the 1Q (-82.3K/month), bolstering the view that the US downturn began in the 4Q of 2007 and is on the mend going into the 2Q.
Unemployment rate: The July Consumer Confidence report saw a sharp deterioration in the labor differential (jobs hard to get/jobs easy to get), suggesting a likely increase in the unemployment rate. Financially stressed households are likely to have sent more members into the labor force, which would result in a higher unemployment rate even if labor conditions did not weaken. For these reasons, we look for an above-consensus increase in the unemployment rate to 5.7% from 5.5% (market consensus is 5.6%). Again, we would suggest that even if the unemployment rate does increase more than expected, it is not necessarily a sign of fresh economic deterioration-employment lags the economy-but rather a likely statistical bump in the road against a backdrop of most other data pointing to stabilization and even improvement.
Conclusion:
The bulk of recent US data suggests the US economy has stopped deteriorating and has begun to stabilize, supporting prospects for further improvement in 2H 2008. Contrast these developments with the sudden downturns in the economic data and outlooks for Europe, UK, Australia and New Zealand, to name just a few, and this is our rationale for being USD buyers on weakness. Because of the typical volatility around NFP reports, we think a misleadingly weak July NFP report will provide an attractive opportunity to buy USD at levels that might not otherwise be seen.
Below are our expectations for the initial price reactions based on the consensus increase to 5.6% in the unemployment rate and for the given ranges of NFP outcomes (increase the size of each move by about 20 pips for every 0.1% greater the change in the unemployment rate):
| NFP change | EUR/USD | USD/JPY |
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| -130K/-80K | +80 pips | -50 pips |
| -40/-80K | +50 pips | -30 pips |
| -40K/ 0K | -30 pips | +20 pips |
| 0K/+50K | -60 pips | +40 pips |
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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