The importance of this set of data may ebb and flow, but it has generally stood the test of time as the key gauge for monetary policy decisions going forward.
The NFP is the release of data which includes around 80% of the US workforce employed in manufacturing, construction and goods. The report does not include government employees, private households or (obviously) those who work on farms. Both the headline numbers, including all-important revisions, unemployment figures and average hourly earnings give investors and traders a vital insight into the state of the world’s biggest economy, showing how businesses are performing. During the pandemic, this has been more valuable than ever, even if the collection of the data has proved difficult and made analysis and forecasting of the report even more precarious than normal.
Part two of the Fed’s mandate
Inflation and employment are the two key pillars of the US Federal Reserve’s mandate. We now know that Chair Powell has ticked off the first goal as the Fed’s favoured measure of inflation is at a 30-year high with labour shortages and supply bottlenecks unlikely to ease in the near-term. Powell confirmed in his Jackson Hole speech that “substantial further progress” has now justifiably been met.
But it’s a different story regarding jobs which remain some 5.7 million below the pre-pandemic level of February 2020. This is obviously a clear improvement on the low point when employment was down over 22million last year when the May NFP printed a negative 20.537 million jobs last year. (Gulp!) With now two straight months of 900k+ jobs gains, the key question for markets and Fed policy is whether we have reached “substantial progress” on the other part of the Fed’s mandate.
Buoyant forecasts, but dollar offered
Aside from the influence on the Fed’s policy stance, this Friday’s report and its potential impact on global markets will also inform us about how the jobs market is holding up as the Delta variant took off. Several activity readings, including yesterday’s ADP report, have softened recently and we may see more of that in job growth. This month’s NFP will also set the stage for how the jobs market may fare as parents and school children head into another uncertain academic year which begins in September. Recent common wisdom is that parents will go back to work, driving accelerated job growth.
Consensus estimates see a headline figure of 750k, and the household survey is likely to report another decline in the unemployment rate in August to 5.2%. This is because participation should rise as unemployment benefits cease and workers return to the labour force.
A strong report should at least cement views that the Fed will announce tapering in September and start in November or December. But the Fed is still in a relatively cautious policy shift mode, especially as there are clears signs of ebbing wider economic data and this has seen the greenback drift lower this week. Breaking the link between tapering and tightening is the next potential market focus and future NPF reports will have a big say in this, as always.
Written on 02/09/2021 by Lukman Otunuga, Senior Research Analyst at FXTM
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