While the US jobs report has been among the most important economic releases in the monthly cycle, it takes on even more significance in the run-up to the September FOMC meeting. The dollar has been confined to narrow trading ranges with small down.
It is a particularly difficult number to forecast though some of the data contained in the employment report is used for input into other forecasts. The ADP estimate was disappointing, and it cited layoffs in the energy sector and weaker job growth in manufacturing. That said, its estimate had mostly been below the initial private sector nonfarm payroll report of the BLS.
Challenger showed a large spike in layoffs–106k in July compared with a 44k average. However, this appears to be mostly a function of a cut in the Army beginning in October, as a two-year plan in implemented. Military personnel are not including in the nonfarm payroll figures, though could impact the household survey.
There are three other factors that are more supportive. The weekly initial jobless claims fell to new cyclical lows the same week that the BLS conducted its monthly nonfarm payroll survey. The ISM non-manufacturing employment index saw a large jump to its strongest reading in a decade. Strong auto sales (the July sales point to a healthy rise in retail sales to be released on August 13) prompted the producers to either reduce or cancel the typical summer shutdowns.
In addition to the nonfarm payroll number itself, average hourly earnings and the average weekly hours, are often reviewed. The Fed is looking at a broad range of labor market indicators to determine improvement. Underemployment (U6) is at 10.5%, the lowest since 2008. Involuntary part-time workers fell 147k in June to 6.505 mln. Long-term unemployed (27+ weeks) fell 381k in June to 2.121 mln.
We note that the implied yield of the September Fed contract is 1.5 bp higher (at 19 bp) than where it finished the previous three weeks. Over the past two weeks, the effective Fed funds rate has been averaging about 14 bp. This suggests that even at this late date, this market is not pricing in a strong chance of a hike next month.
