Non-Farm Payrolls Preview: Jobs recovery to help the dollar?

Historic bust and boom

It’s been a crazy few months of payrolls data released every first Friday of the month and it seems as though this will continue for the foreseeable future as data collection and classification causes complications with painting a true employment picture. The mind-blowing loss of over 20 million jobs in April was followed by the biggest data surprise in history one month later, when the headline number showed a monthly gain of 2.5 million versus a consensus estimate of a 7.5 million fall. The surprise was illustrated by the fact that none of the 75 economists surveyed by Bloomberg predicted a positive figure, with the highest estimate being -800k.

All told, the recovery in employment through May and June replaced just under a third of the 21.5 million jobs lost in March and April, which leaves the economy still missing nearly 15 million jobs. This month’s report is expected to see more gains in July, after the June payrolls rose by 4.8 million. The so-called ‘whisper’ number estimated by traders and other market observers stands at just over 1 million which means that would leave only 39% of the jobs lost through April recouped as of July.

The unemployment rate is expected to fall further towards the peak seen in 2008-9 during the Great Financial Crisis of 10%. Variations in participation are a clear risk to this number, while it must again be remembered there has been an ongoing misclassification issue with the jobless rate which has pointed to the actual rate being at least one percentage point higher.

Deterioration in outlook

Other employment gauges are signalling a mixed picture of employment prospects although some of the data lies outside of the reference period for the July report. This is because the BLS conducts its survey in the second week of each month, so the recovery was still more or less on track in the second week of July.

Higher frequency data like the weekly initial jobless and also continuing claims numbers have slowed in recent weeks. The former hit a five-week high last Thursday and the two consecutive increases highlight the ever more bumpy road to recovery. More recently, Monday’s ISM Manufacturing employment component remained below the break-even 50 level at 44.3. So, although improving, jobs continue to be lost in the sector, albeit at a slower rate than in the previous month.

The sluggish nature of the employment data is in keeping with businesses who remain cautious and are reluctant to expand capacity given the enduring pandemic uncertainty. Any new tightening of lockdown measures, as seen in the three most impacted states – Florida, Texas and California which account for 25% of total US employment – will hit the ongoing healing of the labour market, though these measures will only show up in the August report next month.

Unloved Dollar

The USD tumbled the most in a decade last month and bearish bets on the buck have now increased to the largest short position since April 2018. Having tried to recover over the last few sessions, it is back on the defensive and consolidating around its lows last seen a couple of years ago. The long-term trendline from 2011 does seem to be offering support and holding up the decline for now.

Key for strong gains in the headline NFP will be the continued effort to recall furloughed workers through reopening plans that have only been partly hampered by increasing virus cases. A number well below consensus will simply adds fears over the stalled recovery and push the greenback even lower, with the next stop being the May 2016 low at 91.92.