After two months of disappointments, the market is once again aiming high for this Fridayââ,¬â"¢s non-farm payrolls report.  The current forecast is for companies to have added 160,000 new jobs in the month of June.  However the single biggest argument for stronger job growth is not that the economy has been performing better over the past month, but because the exaggerated weakness in last monthââ,¬â"¢s report increases the odds for exaggerated strength this time around.  Last month, analysts were forecasting that 170,000 jobs were created in the month of May, but only 75,000 jobs were actually reported.   We have learned that whether the consensus forecast is right or wrong is really a coin-toss.  Since January of 2005, the actual release (unrevised) fell short of the survey median 58 percent of the time, which is basically even.  On average, the shortfalls were approximately 70k, versus an upside surprise that averages approximately 48k.  One thing that is consistent is that aside from one month, the difference between the forecast and actual has always been at least 21k, with the average difference being 60k.  So we ask the same question that we ask every month, which is will they be right and if so, in which direction?

What is the market forecasting for the month of June?

Change in Non-Farm Payrolls:        +160k  (previous: 75k)
Unemployment Rate:                     4.6%  (previous 4.6%)
Change in Manufacturing Payrolls:     0k  (previous: -14k)
Average Hourly Earnings MoM:       0.3%  (previous: 0.1%)
Average Weekly Hours:                  33.8  (previous: 33.8) 

Of the 71 economists surveyed by Bloomberg, the range of forecast extends from a low of 55k to a high of 279k.  Such a wide range of estimates suggests that there really isnââ,¬â"¢t that much of a consensus but if we exclude the lone 55k estimate however, the lowest forecast becomes 100k.  Therefore the majority of the experts polled expect a bounce from the previous month and here are the reasons why:

Jobless Claims Support Blockbuster Number

As we mentioned earlier, the non-farm payrolls report for the month of May was the weakest in 6 months.  At the time, jobless claims were also decent and everyone was calling for a strong rebound after the disappointment that we saw in the month prior.  Jobless claims are now at even more encouraging levels.  The four week average of jobless claims in the month of June was 305k compared to 333k in the month of May.  In addition, continuing claims, which is the measure of people continuing to file for unemployment benefits is at a 4 year low.  There tends to be a strong directional correlation between the unemployment rate and continuing claims, which suggests that we could see an improvement in the unemployment rate on Friday as well. 

Consumers are Still Happy

Both the Conference Boardââ,¬â"¢s consumer confidence and University of Michigan consumer sentiment surveys were stronger than expected in the month of June.  Historically confidence tends to be tied to the state of the labor market and the fact that confidence remains high and actually improved from the month prior suggests that consumers still feel pretty confident about their jobs, believing that they are secure and plentiful.   Therefore in order for employment to remain healthy, we would need to see an up tick from last monthââ,¬â"¢s horrid number.

Strong ADP Employment Report Prompts Many Banks to Revise Their Forecasts

The single strongest argument for solid job growth in the month of June was todayââ,¬â"¢s ADP employment report.  According to a survey by payroll agency ADP, non-farm payrolls are predicted to hit 368,000 in the month of June.  This is the surveyââ,¬â"¢s highest reading in its five year history.  Even though the ADP survey over-forecasted payrolls last month by 47k and the month prior by 55k, the index actually has a slightly higher probability of underestimating payrolls.  On average, the standard error of the report on overestimation is 52k versus an average underestimation of 73k.  Therefore even if they are overestimating again this time around, that still puts the possible NFP release above 300k.  In fact, the ADP report has prompted a number of banks to revise their NFP forecasts upwards.  One rather reputable bank that will remain unnamed actually revised their forecast from 100k to 200k after the report. 

However, there are Still Risks that Could Lead to a Weak Number

Just because jobless claims are low and consumers are happy however does not necessarily mean that companies are hiring aggressively, they could just not be firing.  Some companies are currently on hiring freezes and it is quite possible that postponing hiring to see if the economy improves could be a more widespread sentiment.  If this is the case, then non-farm payrolls could remain low which would mean that we have a bigger problem at hand since economic growth is expected to continue to slow.   The employment component of the purchasing managersââ,¬â"¢ indices is also conflicting with the ADP report.  The ISM employment index contracted for the first time in 13 months and hit the lowest level in 2 years.  A contraction was also seen in the Chicago index while there was a slight expansion in the Philadelphia Fed index.

A Good Number Could Still Mean Difficulties Ahead

Even if we do see a strong NFP number on Friday, the labor market could still worsen in the months ahead.  More specifically, the help wanted index generally leads the employment report which makes sense because first companies stop hiring and then begin firing.  The latest help wanted index for the month of May actually hit a 40 year low, which means that even if job growth was decent in June, it still runs the risk of moderating in July, August and September.  A 200k rise in payrolls would also only boost the three month average to 134k, which is hardly indicative of a booming labor market. 

So What Does this Mean for the Currency Market?

The impact on the currency market and the US dollar really depends on the size of the surprise and in which direction.  Traders are leaning more towards a stronger report than a weak one which means that a disappointing number could have a more significant impact on the dollar than a stronger number.  The size of the previous revision is also important.  If the 75k increase in May is revised upwards above 100k, it would contribute to any positive report and offset any negative report.  A 160k in line print for the month of June will probably still be perceived as dollar bullish because it still leaves the door open for the Federal Reserve to raise interest rates in August, but we would need to see job growth in excess of 200k to see a more meaningful dollar rally that could threaten the current uptrend in the Euro.  Alternatively, a sub 125k rise would probably be enough for Euro bulls to take the pair back up towards 1.30.  Either way, we expect a great deal of action on Friday.

Kathy Lien is the Chief Currency Strategist at FXCM.