Nonfarm Payrolls Preview

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From RanSquawk

US Change in Nonfarm Payrolls (Jun) M/M Exp. 165K, Low 77K, High 220K (Prev. 175K, Mar. 88K)

US Unemployment Rate (Jun) M/M Exp. 7.5%, Low 7.4%, High 7.7% (Prey. 7.6%, Mar 7.5%)

Bank NFP Estimates:

  • Deutsche Bank: 145K
  • Barclays: 150K
  • UBS: 150K
  • Goldman Sachs: 150K
  • JPMorgan: 150K
  • HSBC: 155K
  • Citigroup: 160K
  • Bank of America: 165K

Last month's Nonfarm Payrolls beat expectations coming at 175k vs. Exp. 163k with the unemployment rate unexpectedly rising to 7.6% vs. Exp. 7.5% albeit attributed to an increase in the participation rate. Since then we have seen a mixed picture with the employment component of Monday's ISM report falling to the lowest level since September 2009 and Wednesday's surprising higher than expected ADP private sector jobs report which showed a 188k increase in jobs against the 160k expected. It's worth noting that recently the ADP jobs report has proved less useful as a guide to payrolls, since the start of using new methodology in October.

The bulk of estimates lie between150k to 165k, which is below the current six month average of 199.33k. Nevertheless, the average remains near 200,000 for a fourth consecutive month which is significant as the Fed has previously emphasized their focus to cumulative improvement in the labour market and not in the latest figures. Historically, June's NFP has tended to be weak, possibly reflecting the difficulty in seasonally adjusting data for the entry of students and exiting of teachers and related support jobs like bus drivers, cafeteria and safety workers ahead of the summer vacation.

Although the scrutiny of recent job reports has somewhat been overblown, today's release will be keenly watched as investors face up to the prospect that the Fed may begin to scale back QE within the next few meetings. This follows Fed's Bernanke's June 19th FOMC press conference where he also said any change in asset purchases "would reflect the incoming data and their implication for the outlook"

Market Reaction

As was the case last month, a better than expected reading could see initial strength in equities and downside in Treasuries. However, a better reading does heighten the likelihood that the Fed will move to taper QE, hence such a move could be short-lived and we could see a broad based sell-off in T-notes and equities with the prospect that the Fed begin to reduce the level of liquidity pumped into the markets. Conversely, a worse than expected number, especially in the unemployment rate climbs, will shift expectation of QE for longer and hence it is likely upside will be observed in Treasuries, equities and spot gold. In precious metals, Spot gold has fallen over 14% to trade at the lowest levels since Aug 2010 since Fed's Bernanke's press conference, weighed on by strength in the USD with the Greenback having rallied over 4% in the same time period.