Non-farm payrolls preview: will NFP help enhance dollar rally?

What to watch out for in the NFP report

Friday brings yet another volatility inducing event for traders to content with, as the latest US jobs report is released to close out the week. For the most part, this is the one event that pretty much guarantees volatility for markets, with algorithms geared up to take advantage of any shift in the numbers.

As ever, the focus is on the potential impact the release will have upon the monetary policy. However, with markets currently pricing a rate cut at 100% likely, the numbers will instead be judged by how they impact the less likely events, such as a 50 basis point cut. With Reuters currently pricing such a rate cut at 6.8%, and Bloomberg at 17.8%, it is certainly an outside case for now. However, the impact if has upon those numbers are going to be one of the key factors for dollar traders. The relative probabilities for future rates as determined by Reuters is available below.

Non-farm payrolls numbers

The first thing markets respond to when the numbers are released is generally the non-farm payrolls number (NFP), with this figure typically the move-volatile element of the release. This month is expected to see another payrolls figure around the same region as the 164,000 number a month ago. Reuters have the poll pointing towards a figure of 159,000, and a ‘SmartEstimate’ of 164,000. Interestingly, we have seen the past four revisions come in below the first estimate, thus pointing towards the possibility of a downward revision to that 164,000 figure.

Average hourly earnings

Average earnings provides a reflection of where wages are going in the US, with this figure providing a clear link to inflation. Of course, if we see a sharp rise in earnings it will be expected to push inflation higher, restricting the Federal Reserve's (Fed’s) ability to ease monetary policy further. With the US seeing unemployment continue to fall, we are seeing a position where those already employed must be sufficiently compensated to ensure they do not leave to join a rival firm. That lack of the right available candidate is generally reflected through higher earnings and signals a recovery that is well advanced.

By and large, a rise in earnings is seen as a dollar positive effect, typically providing an increase in disposable and real income (depending on how inflation moves). Last month saw inflation rise back to 3.2% following a prior drift that saw the year-on-year (YoY) figure drift lower from the February high of 3.4%. The Reuters poll points towards a decline back to 3.1%, and a SmartEstimate of 3.06%.

Unemployment

This figure can grab the headlines, yet for the most part it is not something that markets move too heavily on unless something drastic happens. By and large, it is expected that unemployment will fall over time, and that has been the case here. Markets expect it to remain at 3.7% this month, coming off the back of a multi-decade low of 3.6% seen in May.

Charts to watch

The dollar has been a big riser throughout the past two-months, with the prospect of a Fed rate cut doing little to hold back the greenback. Interestingly we have seen the dollar index rise back into trendline resistance, dating back to 2016. With the price easing back after initially breaking higher, the ability to surge past or reverse from this level trendline could come down to Friday’s jobs report.