Non-Farm Employment Report May

Non-Farm Employment Report – Expected Scenarios

2 Jun 2017 04:24 PM

This hour the market is waiting for the release of US non-farm employment data for the month of May. This data is very significant and is one of the key fundamentals for the Fed to determine the new course of monetary tightening policy. April had an unexpected reading with a record of 211,000 jobs, following the March reading which came below the level of 100,000 jobs. The Fed sees this as adequate for the labor market’s continuing growth.

Current expectation suggest that 185,000 additional jobs will be added in May. This number is very close to the average monthly additions over the past two years. Unemployment is also expected to stabilize at current levels of 4.4% - the lowest level since the global financial crisis in 2007. The third important issue are the wage rates which have started to improve from the beginning of 2015 but have slowed down over that last three months.

Below is the most important data that may have a direct or indirect impact on the readings that will be released today:

  • ISM Manufacturing index recorded better performance in May than the previous month, with increase in the employment component by 1.5 points compared to April, continuing to grow for the eighth month. (Positive)
  • ISM Non – Manufacturing index recorded better performance in April than in March and exceeded market expectations. The employment component recorded continuing grow for the 38th month, but slowed slightly in April by 0.2 points. (Positive)
  • ADP Employment exceeded expectations and added 253,000 jobs in May, against the expectations of only 181,000 additional jobs. (Positive)
  • Factory orders continued to slow for the third month, rising only 0.2% in April. (negative)
  • Durable goods orders continued to improve from the beginning of the year. April reading was better than the expectations, while the March reading was revised to rise up to 0.9%. (Positive).
  • Weekly jobless claims rose by 248,000, but remain at its lowest level in ten years. (Negative)

Expected scenarios

The First Scenario

The index adding better reading than the current expectations and exceeding the level of 235,000 new jobs, in addition to a wage rates improvement and unemployment stabilization at current levels or further decline. This will strongly support USD and push it up against the euro. EURUSD is expected to fall to a strong support level at 1.1150/60 and maybe heading further to 1.11 levels.

The Second Scenario

The reading of the index within the expected range of between 170 – 200 thousand jobs in May, with an unemployment rate stabilization and wage rates improvement. This scenario will also support the USD and make it hold up in light of recent tensions in the United States that have clearly affected it. EURUSD is expected to see a decline to the level of 1.1180/90.

The Third Scenario

This is the most pessimistic scenario, with May readings coming below expectations or below the level of 100-140 thousand jobs. This scenario will be more negative on USD and will push it to retreat significantly against its rivals, especially the euro, possibly returning to the levels of 1.1250 again, which is a strong resistance level to the pair.

This data will be the last card in the Fed’s hands before the mid-month meeting. Positive data would be a statement of the Fed to continue raising of the interest rate for the third time in the last two years. It will support the USD which has recently weakened in the midst of political turmoil in the White House, with the last controversy coming just yesterday when Donald Trump announced US withdrawal from the Paris climate change agreement, in addition to his unclear economic policy so far.

We’re more inclined towards the second scenario which suggests that the economy will add jobs within the expected range between 170 – 200 thousand jobs, and unemployment rates will stabilize at their lowest level in more than 10 years at 4.4%. Also including the stabilization of the average per capita hourly wage at 0.2% (MOM) and at 2.5% (YOY). Such data would make the USD hold on after a period of turmoil.

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