June job growth may leave tapering plans on track

On Friday, July 5, at 0830ET/1230GMT the US is forecasted to report a change in total non-farm payrolls (NFP) of +165K (prior +175K; range +220/77K), a change in private payrolls of +175K (prior +178K; range +200K/+85K), and a decline in the unemployment rate to 7.5% (prior 7.6%; range 7.7/7.4%), according to Bloomberg market surveys. Our forecast model indicates a June headline NFP number of +196K jobs, which is above consensus forecasts. We expect all 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 fall to 7.5%.

Recent labor market data has been encouraging with a gain in ADP (Automatic Data Processing) payrolls of 188K in June which was above the 160K consensus and an improvement from the 135K print in May. The employment component of the ISM (Institute for Supply Management) manufacturing report dipped to 48.7 from the previous 50.1. This was the lowest reading since September 2009 and suggests a loss of manufacturing payrolls. 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, jumped to 54.7 in June from the May’s 50.1 reading. Weekly initial jobless claims continue to slowly grind lower with the 4-week moving average around 345K. Also of note, the Conference Board labor differential (the jobs plentiful reading minus jobs hard to get reading from the consumer confidence survey) is at its highest level in five years.

As the Fed has clearly stated that the adjustment to quantitative easing (QE) is dependent on data, Fed officials and market participants will be watching labor data closely. Therefore, notable improvement in employment figures may serve to reinforce the view that tapering asset purchases will occur sooner rather than later. However, we think that employment data in the coming months may be more telling as higher US yields will be a factor present during the entire reporting period unlike this Friday’s release of June figures. Data in an environment of higher yields will be more reflective of market conditions in the absence of Fed stimulus. For now, a 196K print in NFP with a decline in the unemployment rate to 7.5% would signal that labor market improvement is still on track and that QE tapering is likely later this year.

If the NFP reading surprises to the upside, the USD is likely to benefit as Fed tapering expectations increase. A reduction in the pace of asset purchases is generally positive for the USD as the Fed’s balance sheet expansion slows. Furthermore, markets appear to be shifting back to an environment where strong US data is a positive for the USD rather than a negative (when positive data boosts risk appetite and weakens the USD). Therefore given our above consensus NFP forecast, our outlook is for potential USD strength.

USD/JPY tends to respond well to NFP releases as the pair has a strong relationship with US treasury yields. A strong employment report would likely put upwards pressure on treasury yields amid increased tapering expectations and consequently this could support USD/JPY. Currently, USD/JPY is approaching potential support around the 55-day simple moving average (SMA) of 99.20. Significant support is below at the convergence of the 21-day SMA, 100-day SMA, 23.6% Fibonacci retracement (of the rally from 2011 lows to 2013 highs), and the top of a bull-flag pattern around the 97.10/40 area. A break below the 97.00 figure would negate our bullish bias. To the upside, resistance is likely around 101.25/30 which is the base of a long-term bullish channel and daily ichimoku cloud chart.

Source: Forex.com

03.07.2013