The Non-Farm Payrolls report is always one of the most important economic releases in the currency market and this Friday’s figures for the month of May are no exception. Healthy labor markets remain key to the dollar bullish case. With housing continuing its slow motion meltdown which is now starting to seep into retail sales new jobs will be the primary determinant of fresh consumer demand which in turn will be critical to any future US economic growth. The EURUSD has continued to range trade between 1.3650 and 1.3400 as markets presently find themselves in a state of equilibrium. The EURUSD is unlikely to move much above or below the current range levels unless one or the other of the two scenarios comes true.

Euro-zone consumer demand picks up markedly allowing the ECB to entertain the possibility of rate hikes beyond 4%.

or

US tilts into a recession forcing the Fed to lower rates despite serious inflationary pressures existent in the system.

While the first scenario appears unlikely at this moment as Euro-zone consumer demand is experiencing it own problems with Bloomberg Retail PMI data slipping below the 50 boom/bust line for the first time in three months, the second scenario may gather credibility if the NFP numbers print substantially below forecasts. With US Retail Sales last month printing at -0.2% - the first negative read in 7 months - and with US GDP for Q1 revised to an anemic 0.6%, the labor market remains the last defense against the possible onset of a recession. As housing values have declined, consumers are no longer able to extract mortgage equity to help them finance additional purchases. Therefore, jobs and rising wages become the last source of new revenue for the US consumer. Some analysts have argued that the recent stock market rally will help offset some of the declines in housing keeping the wealth effect in tact. However, the majority of US consumers are only exposed to the equity markets thru their 401K pension plans and therefore any recent gains remain illiquid and inaccessible, greatly limiting their impact on spending. Thus, with more than 70% of the US economy driven by consumer spending, new job growth becomes vital to the health of the US economy.

What does this mean for the US Dollar?

Generally the impact on the dollar of the NFP report may be muted unless the results are wildly out of line. Expectations for the release vary greatly – from a high of 224K to a low of 45K. The broad consensus is at 135K with the latest derivates auction numbers from CME suggesting a print of 121K. If payrolls register a reading within a few thousand of the 100K mark the EURUSD should see only a minimal impact on price. In that case the news would suggest that the US economy continues to expand at a moderate pace. A print above 175k would most likely provoke a dollar rally, as it would reinforce the idea of another Fed rate hike, especially given the generally hawkish bias of the US monetary authorities. On the other hand a very weak number near the 75K level could spur another test of the all time highs in the EURUSD although that scenario appears to be less likely, unless the dour employment data would be corroborated by similarly weak reading from the upcoming ISM Manufacturing and Services surveys. Overall, the report may produce lots of heat and little light, as trading is most likely to remain contained within the familiar 1.3650-1.3400 range.

What is the market expecting for May?

Change in Non-Farm Payrolls: 135k Forecast, 88k Previous
Unemployment Rate: 4.5% Forecast, 4.5% Previous
Change in Manufacturing Payrolls: -15k Forecast, -19k Previous
Average Hourly Earnings: 0.3% Forecast, 0.2% Previous
Average Weekly Hours: 33.8 Forecast, 33.8 Previous

The odds are in favor of a better NFP number, but there are arguments supporting both weaker and stronger job growth:

Examining the NFP Leading Indicators

Arguments for a Stronger Payrolls Report

- Employment Component of Chicago PMI Increases
- Monster Employment Report Shows Robust Gains
- Jobless Claims Remained at Lowest Since January

Arguments for a Weaker Payrolls Report

- ADP Employment Remains Below 100k for Fourth Month in Row
- Hudson Report Shows Households Less Confident of Future Hiring

An early release of the NFP report leaves us without the benefit of some key leading indicators such as the ISM reports to better gauge for same-month US job growth, increasing uncertainty around the upcoming release. The data we have seen up to now paints a mixed picture for domestic employment figures. On the one hand, a drop in Jobless Claims raises the prospect that unemployment remains low across the economy. The weekly report showed that the number of unemployment claims stayed at their lowest since January for weeks ending May 4th and 11th. To put this into perspective, January saw an addition of 111k jobs on the month’s NFP report, but this was later revised to an impressive 162k. The last time the four week moving average of jobless claims was this low was back in February 2006 when non-farm payrolls printed a very hot 300k. The recent Monster Employment and Chicago PMI reports likewise add to the bullish case for NFP’s, as the headline index for online job ads rose to 189 points from 186 previous while the employment component of Chicago PMI increased from 50.5 to 57.3. According to company officials, the popular job listings service has shown consistent gains in new job advertisements, registering a 13 percent year-over-year rate in April. Though this overstates employment changes in the broader economy, the 3 point gain in new jobs bodes well for Non Farm Payrolls in May.

Looking at the most recent ADP data, however, job creation in the private sector was worse than economists had predicted. Median estimates showed expectations of a 120k gain, but the headline number remained below 100k for the fourth consecutive month at 97k. It is worthwhile to point out that the ADP survey has been a less-than-ideal predictor for the official US Non Farm Payrolls change, but the result was nonetheless enough to cut forecasts for the upcoming Bureau of Labor Statistics data. Looking to other private employment news sources, the Hudson Employment Index showed slowed hiring projections through the month of May. Employees were the least optimistic of job prospects since January, with only 31.8 percent predicting that their company would be hiring more workers through “the next few months”. Whether this translates into a lower May Payrolls change is yet to be seen, but the trend leaves risks to the downside for the future of US employment gains.

Conclusion

As always with Non-Farm Payrolls, it is important to keep an eye on both the headline and revision number. In all likelihood the May numbers should print in the neighborhood of 100K. However the revisions from the month prior may serve as a tipping point. An upward revision would eliminate much of the concern about the recession scenario in H2 of 2007 and would most likely put a bid underneath the greenback. However a downward revision off the already weak 88K print last month would be quite bearish for the dollar and put the EURUSD on a path to retest its recent highs.

Boris Schlossberg is a Senior Currency Strategist at FXCM.