May job gains not likely to alter Fed view

On Friday, June 7, at 0830ET/1230GMT the US is forecasted to report a change in total non-farm payrolls (NFP) of +165K (prior +165K; range +210/80K), a change in private payrolls of +177K (prior +176K; range +220K/+95K), and a steady unemployment rate of 7.5% (prior 7.5%; range 7.7/7.4%), according to Bloomberg market surveys. Our forecast model indicates a May headline NFP number of +166K jobs, which is largely in line with consensus forecasts. We expect most of the job gains to come from private payrolls with a drag from a reduction in government payrolls and we anticipate the unemployment rate to remain at 7.5%.

With key members of the Federal Reserve indicating the flexibility to adjust asset purchases as needed, markets are likely to be sensitive to economic data surprises. The Fed has a dual mandate of price stability and maximum employment and therefore labor market developments are significant to the outlook for monetary policy. As outlined in the Federal Open Market Committee (FOMC) policy statement at the last meeting, “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

Expected changes to the size and pace of quantitative easing (QE) tend to be inversely related to the performance of the USD. When markets anticipate a reduction in the pace of balance sheet expansion, the USD tends to benefit as fewer purchases means fewer dollars being printed by the central bank. On the other hand, an expected increase in the size or pace of QE would suggest an increase in the supply of USD, which tends to have a negative impact on the dollar. For now, the outlook is tilted towards a tapering of asset purchases and therefore the potential is for a strengthening USD if this outlook is further supported by labor data. We think that the pace of job growth will pick up from the previous month, however it is likely that payrolls will struggle with the 200K level that many economists have suggested is needed on a consistent basis in order for the Fed to taper QE.

Recent labor market data has been on the soft side with a disappointing gain in ADP (Automatic Data Processing) payrolls of 135K in May (cons. 165K), however this was an improvement from the prior 113K. The employment component of the ISM (Institute for Supply Management) manufacturing report fell slightly to 50.1 from the previous 50.2 which indicates only narrow expansion. The ISM service sector employment component, which we tend to weigh more heavily in our forecast model since services represent a much larger portion of the US economy, also fell to 50.1 but the drop was steeper after a reading of 52 in the prior month. The 4-week moving average in initial claims has ticked up in recent weeks but continues to trend lower over the long-term.

We think that the impact on tomorrow’s employment report will be closely tied to the implications on Fed policy and less on the broader risk environment. A better than expected May reading and/or significant upward revisions to the prior month’s figures may fuel speculation that Fed tapering is imminent. Under this scenario, US treasury yields would likely move higher and USD would likely benefit. As USD/JPY has a strong relationship with US treasury yields, we would expect to see the pair rally on the back of a strong labor report. A key level to watch in USD/JPY is the 55-day simple moving average (SMA) which is just below the 99.00 figure and currently acting as support. If this holds as support, we would anticipate a rebound towards the 100.00 big figure initially. The 21-day SMA is the next level to the upside and is currently around 101.30/35.

If labor data shows deteriorating conditions, the USD may come under pressure. A break below the pivotal 55-day SMA in USD/JPY may see the pair decline towards the 100-day SMA which is currently around 96.25. Technical indicators in AUD/USD are showing that the pair may be oversold and a weak US jobs report could spark a near-term rebound in AUD/USD. The levels to watch in AUD/USD are the 2011 low around 0.9385/90 which is a significant downside pivot and the 200-hour SMA is currently around 0.9600 which may be resistance.

Source: Forex.com

06.06.2013