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The first Friday of the month is upon us with the Non-Farm Payrolls report. Once again, the key data point is wages. The Fed focuses on core inflation and a rise in this measure is basically impossible without Americans getting a raise. In recent releases, the initial reaction was the wrong one, providing an opportunity.

We could see that again in the July  7th publication. Here is a preview:

Watch late wages reaction

In many of the previous releases, we have seen how markets initially reacted to the headline jobs number but then turned their attention to the wage data. The latter had the upper hand. In some cases, strong job gains of over 200K sent the dollar higher, only to fall sharply afterwards as wage data disappointed. And the drops continued, showing us that wages were the winners. We also had

We also had the opposite case:  a weak rise in jobs sent the dollar to lower ground only to bounce back up on a rise in wages. The “full employment” theory took over: employers are finding it harder to find employees, hence fewer job gains, and are willing to pay more, thus the wage gains.

June 2017 NFP

The report for June 2017 is published on 7.7.2017. Will the magic number of 7 make it special? Not really. But the reaction could be messy.

Markets are expecting 175K jobs gained, in line with the averages and above last month’s 138K. The initial reaction will come from this number but it is unlikely to last.

In order to have a significant reaction from jobs, they would either need to fall below 100K or jump above 250K.  

Yes, this is an extremely wide range, but wages matter more. Any number in between, which is very likely, would keep the focus on wages. Only a drop under 100K would have a long-lasting negative impact of its own. And only a gain of 250K or more would boost the greenback for a long time, regardless of wages. But these scenarios are unlikely.

So let’s get back to wages.  Monthly wages are predicted to rise by 0.3%, above the 0.2% level seen in May.  What matters most is year over year job gains. These stood bang on the average of 2.5% last time. And this is the critical number to watch.

3 scenarios for wages

  1. 2.5% to 2.6%: This is the “more of the same” scenario, where the Fed and everybody else can see choose to see it as either “solid and steady” or “stagnant and frustrating”. The dollar is likely to wobble and rate hike expectations will likely remain unchanged at one rate hike in December.
  2. 2.7% or higher: A rise in wages will vindicate the recent Fed hawkishness, as seen in the rate statement. The economic slowdown of Q1 and the fall in inflation will be seen as temporary once again. Rate hike expectations could even be brought forward to September. The dollar is likely to gain ground. Against some currencies, the recent correction of the dollar could turn into an uptrend.
  3. 2.4% or lower: A slowdown in wage growth would be a bitter disappointment for everybody. Without a rise in earnings, the optimism about inflation will be reconsidered and the next rate hike could wait for 2018. The dollar will be under pressure.

More:  EUR/USD: Roadblocks Ahead; Fade Strength – Barclays