US July Payrolls: Jobs growth to fall back down to earth - TDS

Research Team at TDS, suggests that after the blockbuster 287K job gains in June, TD expects the pace of growth to come back down to earth with the economy adding 188K jobs.

Key Quotes

“Despite the slowing in jobs growth momentum, the 6M average should tick modestly higher to a healthy 175K pace. The job gains should be sprinkled across most sectors, with rising hiring activity in the pro-cyclical manufacturing, professional services, construction, retail and transportation sectors underpinning the rise in labor demand. The 177K gain in private sector employment will be boosted by a further 11K rise in public sector employment, owing to rising state and local government hiring activity.

Despite the strong gains in employment, the unemployment rate should remain unchanged at 4.9% on account of rising labor force participation, as more workers move back into the labor force in search of jobs. Wage growth, however, should accelerate to a solid 0.3% m/m pace, though the annual pace of average hourly earnings growth should remain unchanged at 2.6% owing to unfavorable base effects. And with economic growth momentum expected to drift lower in the coming months, we expect the pace of jobs growth to also slow towards the 150K mark. For the Fed, a print in the 175K to 200K range will provide some encouragement on underlying economic strength, though it is unlikely to change the dial on their wait and see policy stance.

Foreign Exchange

The 16K standard deviations of forecasts is historically small, which suggests the market positioning is for a more-balanced report. With the OIS rate pricing in about an 18% chance of a hike in September, this opens the possibility for a big response in the event of a surprise. We think 160K is probably the threshold for a “good” report, while 200K+ indicates a “strong” number. Anything below 160K probably closes the books on a September hike, adding renewed pressure on the USD. As long as NFP remains close to that breakeven level, high-beta currencies should hold up.

Conversely, a strong number probably leads to fresh repricing of a September hike, lifting the greenback against the majors. Higher-yielders are most at risk since valuations for some of these currencies look a bit stretched. We would favor selling AUD and NZD on a strong print. Our call for +188K and is likely mixed for the USD. Decent growth with little appetite to hike in September favor carry trades, but mild repricing of the Fed could be enough to lift the USD against the G10 lowyielders.”