NFP: A Tepid Print Will Confuse

It’s here and market tension is high, as today’s US labor report probably has more riding on it than usual. Some of the less confusing Fed rhetoric of late will either be vindicated or investor’s will become more confused than usual. In the US, market consensus is looking at non-farm payrolls to print +160k’ish in June, with private payrolls at +170k’ish. On the whole, these are certainly not huge numbers for an economy that is supposedly gaining a ‘solid’ footing. A print like this will also confirm that the US has already witnessed a faster pace of job growth and that was at the beginning of the year. This global market needs a print that will be used as the “new” strong benchmark.
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Apart from the actual unemployment rate, the rest of the US job report details tend to get drowned out in the headline noise. With the Fed unofficially targeting the unemployment rate as a monetary “lukewarm guidance,” investors are beginning to put more of an emphasis on it. The market expects the unemployment rate to ease a tad to +7.5%, average hourly earnings to rise +0.2% and the workweek to come in unchanged at 34.5 hours. For the US to push the unemployment rate closer to a sub-7% print, NFP would probably require a solid +200k print every month until the end of the year and maybe a tad longer. Despite this, the market still has Fed tapering on the table for Q3.

As per usual, today’s print will have US money markets quickly pricing in the Fed’s next move. Assuming everything goes according to plan, September is the bookies favorite for the Fed to begin their “tapering” process. However, a strong number this morning and the futures market will not be ruling out a July announcement. Of course, the market is assuming that there will be no major downside surprise in today’s headline prints. The biggest risk for today would likely be the reaction to a particularly strong reading. An aggressive positive headline would only “exacerbate any ensuing sell-off,” as both dealers and investors swiftly price in a greater probability of tapering occurring sooner rather than later.
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Already this week’s labor indicators, the strong ADP and ISM services employment component readings, may have ‘over’ influenced the market expectations for an above consensus print (+170k) – anything higher and the market will have locked in a July taper. All the positives are good for another USD rally against G10 and EM currencies. Obviously a weaker print and USD will be expected to retrace a good chunk of the recent gains. The biggest concern and certainly the scenario that will cause the most market confusion is a reading near or on consensus. It will do very little to “clear uncertainty about the Fed’s policy plans, suggesting that a July taper might remain an option, if data were to remain firm ahead of the next FOMC meeting.”

To date, the 17-member EUR rebound since yesterday’s ECB sell off have been rater negligible. This morning’s NFP risks have been restraining speculators from “aggressively” selling the single currency. Currently, the core-Euro ‘shorts’ remains modest – traders seem to have insignificant EUR shorts to justify the more bearish of fundamentals. The lack of bearish bets is probably key to how aggressive the post-NFP move will be. Most of the EUR’s move today has been driven by the demand for JPY. The bull or bear could probably provide varying degrees of selling post jobs release – a strong NFP and the dollar get support. It things do go “pear shaped” then JPY looks attractive and this mornings German manufacturing orders disappointment (-1.3%) will be cited and used as a reason to sell the EUR on rallies alone.

A strong NFP may not lead directly to a higher USD/JPY. So far, talk of tapering has allowed for big dollar gains against emerging FX and this has led to risk aversion in G10 FX. The dollar is the primary risk aversion currency of choice followed by the Yen. IMM reports that speculators are not that short Yen at current levels, but hold large upside option strikes (purchased between ¥101 and ¥105). This scenario should cap an immediate dollar move higher.

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