Will Nonfarm Payrolls Produce a Surprise?

Will Nonfarm Payrolls Produce a Surprise?

With razor sharp focus the markets will turn their attention to the highly anticipated release of nonfarm payrolls (NFP) for July in the US on Friday morning. Because the release is seen as a proxy for the relative health for US employment and the broader economy, the release will move markets with the direction depending on the underlying narrative provided by the data itself.

Will Nonfarm Payrolls Produce a Surprise?
Will Nonfarm Payrolls Produce a Surprise? Getty Images

The monthly NFP reading will add an exclamation point to a week marked by a weakened US Dollar under pressure from mixed data and softening expectations for future rate increases. Friday’s NFP number can have an outsized effect if it is especially soft given the weakness in the Dollar. However, the weekly initial jobless claims data continues to provide historically low levels of folks seeking unemployment insurance, and the overall number of people on unemployment insurance has remained below two million for a record number of weeks, which indicates we could expect a healthy NFP print.

In advance of the release, we are following the indicators below, and using their signals to inform our overall modelling in advance.


Will Nonfarm Payrolls Produce a Surprise?

Rather than a clear linear trend, the current picture represents more of a mosaic with broader economic signals such as sentiment providing for a murky and slightly bearish outlook. On the other end of the spectrum, employment specific data and indicators are strong and trending stronger.

The ADP private payroll number provided a value of 178k new jobs, and while this is positive, and the NFP and ADP numbers do correlate over time and move in similar directions, there is less of a link month to month than most would expect. The ADP number is currently part of an overall positive picture for employment levels, but we can see deviation in the NFP number in any given month.

Will Nonfarm Payrolls Produce a Surprise?

Due to this mixed picture, we see NFP continuing to trend in the current range and direction around 200k. However, due to the uncertainty and competing data between the broader economy and the ground level employment data, we believe there are elevated levels of uncertainty with respect to this month’s number. We see potential risk for a surprise in the number, especially to the topside all the way up to a limit of 290k.

The below Pareto graph provides a look at the historical ranges over the last four years and the relative probability of each in the form of a percentage.

Will Nonfarm Payrolls Produce a Surprise?


Looking historically, 18 months out of the last 48 the NFP number has landed between 187k and 259k, and the four-year moving average is safely in the middle at 209k. However, on 31 occasions, or over half the time, the number in the last four years is either above or below that rather wide range.

Below is a histogram representing the results from a simulation model that ran over 100k simulations:


Will Nonfarm Payrolls Produce a Surprise?

The above histogram indicates base guidance of 200k-210k, but offers a view of meaningful tail risk both above 250k and below 150k. Based on the elevated levels of probability for a surprise from model results, and the fact we have not seen a surprise in a few months and we seem due, we envision three potential scenario’s:

“Right on track” – This is our base case scenario for tomorrow. This is an NFP number in the 170k-220k range. The Dollar is relatively unaffected and the trend of mixed data releases from the US continues. We would expect Dollar/Yen to potentially continue in the 109.50 to 110.50 range tomorrow in this scenario.

“Room to run” – This is the second most likely scenario in our estimation. This would be an NFP release north of 220k and would lead to a pivot in the current downward trend of the Dollar. If we get a number north of 220k, we would expect a stronger Dollar across all major currency pairs through the day on Friday, and the talk of a coming rate hike from the Fed would pick up steam. We would expect USDJPY to possibly test the 111.00 level during the day tomorrow in this scenario.

“Look out below” – This would be a number south of 170k and would lead to a sharper drop in the dollar across major currency pairs tomorrow. The talk would turn to a pause in Fed tightening amid a slowing labor market. We would expect the USDJPY pair to potentially trade around the 108.00 level in this scenario.

While our current base case is for the “right on track” scenario, we encourage traders to consider strategic options at the far ends of the possible NFP spectrum in either direction. We see elevated risk for a surprise in either direction tomorrow, which would add material velocity to an already active Dollar and bring the week to a close on a rather eventful note.

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