US Non-Farm Payrolls (NFP) in Focus - Can the Job Data Sway the Fed?

US NFP (nonfarm payrolls) report preview: 1 September 2023

• Wall Street surveys expect August non-farm payrolls to have increased by 170,000 in the month of August (down from 187,000 in July).
• The unemployment rate is expected to remain steady at 3.5%
• Average hourly earnings are expected to have increased by 0.3%

The US NFP report is an important data release that is closely monitored by the Federal reserve(the US central bank). Although this particular report is considered to be a lagging economic indicator (it reports on the job data from the previous month), it is still considered to be a key barometer of growth for the US economy.

Although this particular report is considered to be a lagging economic indicator (it reports on the job data from the previous month), it is still considered to be a key barometer of growth for the US economy.

Understanding the Fed’s dual mandate:

With the Federal Reserve operating with a dual mandate its main objectives are:

1. Achieving price stability (an inflation target of 2%)
2. Maintaining a full level of employment (an unemployment rate below 4%)

With employee situation summary usually released by the Bureau of Labor Statistics (BLS) on the first Friday of the month, the August data is scheduled for today at 12:30 GMT, which could serve as a catalyst for volatility and price action.

Understanding the NFP report: What do the terms mean?

• The headline NFP number: Represents the monthly change in the number of paid workers entering the US labor market - farm workers, the federal government, private households and those employed by non-profit organizations are excluded from the report).

A number above 170,000 estimate would indicate that the labour market is expanding, while a negative number suggests a slowdown in the job market.

• Unemployment rate: The percentage of the population who have been actively seeking work over the past four weeks (and who are willing and available to work).

A reading equal to or below estimates (3.5%) suggests that the labour market remains tight, above 3.5% means that the percentage of the working population has declined.

• Average hourly earnings: The monthly percentage change in wages earned by workers (on an hourly basis).

If average hourly earnings is above forecasts (0.3%), it would suggest positive wage growth which contributes to inflation and to higher rate expectations. A reading below 0.3% may be a sign of easing wage growth and therefore unchanged/lower expectations.

Monetary policy and NFP’s

Although JOLTS and ADP employment (levels of nonfarm private employment) released this week suggested that the US labour market may be losing steam, inflation data released yesterday came in-line with expectations, showing no further signs of easing over the past month:

• Core PCE price index YoY - 4.2%
• PCE price index YoY (July) - 3.3%

As both readings remain well-above the objective target of 2%, an unemployment rate below 4% has thus far allowed the Fed to continue on its aggressive rate hiking cycle, through aggressive rate hikes.

JOLTS report highlighting a decrease in job openings for July

Source: Bureau of Labor Statistics (BLS)

With the upcoming FOMC rate decision scheduled for 20 September 2023, the August NFP data could alter the rate probabilities for the next meeting.

At the time of writing, expectations for a pause in rate hikes is at 89%, with a 11% probability of a 25 basis point rate hike.

Fed probabilities for the September FOMC

Source: CME Fedwatch tool.*

However, if the headline figure comes in above expectations, the unemployment rate decreases or average hourly earnings rise, expectations for another rate hike may increase, fuelling USD strength and potentially driving non-yielding assets (stocks, commodities and cryptocurrencies) lower.

With the forex market generally seeing the largest trading volumes before, during and after the release of NFP’s, GBP/USD, EUR/USD and USD/JPY could be influenced by the report, which could filter into Monday’s trading session, when liquidity in the US market is likely to be lighter than usual due to the bank holiday (labour day).

USD/JPY daily chart

Chart prepared using TradingView

In the build up to NFP’s, USD/JPY has been trading cautiously around the level of 145.45. With the 78.8% fibonacci retracement level of the October 2022 - January 2023 move currently providing resistance at 146.65, a positive NFP job report could reignite the uptrend, opening the door for a bullish continuation, back toward the weekly high of 147.374.

On the contrary, if NFP’s disappoint, a weaker USD could drive USD/JPY lower, allowing for a potential retest of the 50 - day MA, providing support around the 143.00 mark