NFP Preview: How Unemployment Could Decide if the Fed Goes 25 or 50

NFP Report Key Points

• NFP report expectations: +164K jobs, +0.3% m/m earnings, unemployment at 4.2%
• The leading indicators point to an as expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 130K-200K range
• The US Dollar Index (DXY) remains under pressure, despite last week’s bounce.

When is the August NFP Report?

The August NFP report will be released on Friday, September 6 at 8:30 ET.

NFP Report Expectations

Traders and economists expect the NFP report to show that the US created 164K net new jobs, with average hourly earnings rising 0.3% m/m (3.6% y/y) and the U3 unemployment rate ticking down to 4.2%.

NFP Overview

For someone who writes an NFP report and hosts a live NFP webinar monthly, come hell or high water, the Federal Reserve’s renewed focus on the labor market is a godsend. As Fed Chairman Powell emphasized at the Jackson Hole Economic Symposium last month, interest rates are now more dependent on unemployment than the inflation rate, making the monthly NFP report arguably more important than it’s been since the peak of the COVID pandemic.

Last month’s jobs report triggered the vaunted “Sahm Rule” that looks at how much the unemployment rate has risen off its 12-month low as a sign of an incoming recession, and traders will be keen

to see if the unemployment remains at a (relatively) elevated level or moderates back toward 4.1 or 4.2% this month. Perhaps most importantly, traders are pricing in nearly 50/50 odds of the Fed cutting rates by 50bps (vs. 25bps) later this month, so Friday’s jobs report could tip the scales one way or another.

In terms of the NFP expectations, traders and economists are anticipating a slight moderation from last month’s jobs growth, with wages and the unemployment rate expected to come in roughly in line with recent trends:

Source: StoneX

NFP Forecast

As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report:

• The ISM Manufacturing PMI Employment component rose to 46.0 from 43.4 last month.
• The ISM Services PMI Employment component dropped to 50.2 from 51.1 last month.
• The ADP Employment report showed 99K net new jobs, down from the downwardly-revised 111K reading last month.
• Finally, the 4-week moving average of initial unemployment claims ticked down to 230K, off last month’s high near 240K.

Weighing the data and our internal models, the leading indicators point to an as expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 130K-200K range, albeit with a big band of uncertainty given the current global backdrop.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which came in at 0.2% m/m in the most recent NFP report.

Potential NFP Market Reaction

Rather than our traditional table analyzing the potential moves in the US dollar relative to job creation and average hourly earnings, I wanted to highlight this table on the Fed’s potential reaction function from our parent company, StoneX:

Source: StoneX

As the table shows, the Fed will be more focused on the unemployment rate and job creation than wages in the current environment. One way or another, this jobs report could well tip the scales for the Fed’s decision, setting the stage for potentially volatile moves in the US dollar and other US assets.

US Dollar Technical Analysis – DXY Daily Chart

Source: TradingView, StoneX

Looking at the chart of the US Dollar Index (DXY), the world’s reserve currency remains in a well-defined downtrend despite last week’s bounce. The near-term reaction in the US dollar will likely follow the likelihood of a 25bps rate cut from the Fed (bullish) vs. 50bps rate cut (bearish) as outlined in the chart above, but ultimately, the dominant downtrend and potential for consistent interest rate reductions from the Federal Reserve in the coming year could keep the greenback under pressure as we move through the fall regardless.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX