NFP Preview Another strong jobs report should clinch a June rate hike and boost USD

As of Thursday morning, less than a day before Friday’s pivotal US non-farm payrolls (NFP) jobs report, futures markets (according to the CME Group’s FedWatch) are pricing-in more than a 95% likelihood of another 25-basis-point interest rate hike by the Federal Reserve during its mid-June meeting. This extremely high market-viewed probability has been further buoyed by Thursday’s ADP private employment report, which showed a stellar increase of 253,000 private-sector jobs in May against prior expectations of around 185,000. Leading the way in US private employment were services and construction, both of which saw broad increases in payrolls. Although the ADP report is not necessarily a very accurate pre-indicator of the official NFP jobs data from the US Labor Department – and sometimes even misses the mark dramatically – it does help indicate continued and increasing strength in the overall US employment picture, which bodes very well for an impending Fed rate hike.

Because Friday’s NFP and its related US jobs data will be the last major employment report before the Fed announces its interest rate and monetary policy decision less than two weeks from now on June 14th, it takes on an exceptional significance. In the May FOMC statement, when rates were left unchanged, the Fed stated that "job gains were solid, on average, in recent months." This was a departure from the statement issued after the previous FOMC meeting in March, which simply asserted that “job gains remained solid.” This subtle change in wording was a delicate nod to the highly disappointing employment numbers released in early April for the month of March – 98,000 jobs added (later revised down even lower to 79,000) against prior consensus forecasts of around 175,000. However, April’s data that was released in early May showed a resoundingly positive bounce-back at 211,000 jobs added, with an April unemployment rate of 4.4% – the lowest level in a decade.

Will Friday’s May employment results continue to be strong enough to help fuel a mid-June rate hike? A combination of pre-indicators suggests that this may indeed be the case. If so, the US dollar, which has been heavily pressured for much of the past three weeks, could finally experience a relief rebound in anticipation of higher US interest rates going forward. With that said, however, expectations of a June rate hike have been running high for quite some time. These expectations may already have been baked-in to the price of the US dollar. Therefore, if Friday’s NFP report disappoints and disrupts these expectations in any major way, the dollar could take a very significant further hit.

Expectations

Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and wage growth, are currently around 185,000 jobs added for the month of May. The May unemployment rate is expected to have remained steady from the previous month at a low 4.4%, while average hourly earnings are expected to have increased by 0.2%.

Jobs Data Preceding NFP

Key employment-related data releases for May preceding Friday’s NFP included the ADP private employment report, ISM manufacturing PMI employment component, and weekly jobless claims data throughout the month. The important ISM non-manufacturing (services) PMI will not be released until next week, so will not be factored into Friday’s NFP forecast.

As previously noted, Thursday’s ADP data showed substantially better-than-expected numbers at 253,000 private jobs added in May against previous forecasts of around 185,000. ISM manufacturing employment in May, also released on Thursday, showed even faster growth and expansion than the previous month at an index level of 53.5 (above 50 indicates expansion), against the previous month’s 52.0. This caps off eight consecutive months of manufacturing employment expansion thus far.

Finally, May’s weekly jobless claims data was generally upbeat and positive, remaining very low overall from a historic perspective. Of the four weeks that made up the bulk of May, unemployment claims were better (lower) than expected throughout the month with the notable exception of the most recent week’s data, released on Thursday, which showed a higher-than-expected 248,000 unemployment claims against the 239,000 expected.

Forecast and Potential Market Reaction

Overall, pre-indications are pointing to a potential continuation of positive US employment data in May from the previous month. With prior consensus expectations of around 185,000 jobs added in May, our target range is around 185,000-200,000. As noted previously, this jobs report will be of critical importance for the Fed, especially since June’s FOMC meeting is less than two weeks away. As such, any outcome significantly lower than forecast should temper high Fed expectations and lead to a further pullback for the dollar. A result in the higher end of the target range or above should keep Fed hike expectations elevated and help support a potential dollar relief rally and recovery after the recent USD downturn.

NFP Jobs Created and Potential USD Reaction

> 225,000
Bullish

201,000-225,000
Moderately Bullish

185,000-200,000
Neutral

150,000-184,000
Moderately Bearish

< 150,000
Bearish