US: August nonfarm payrolls to moderate to a 175k pace - TDS

Analysts at TDS expect August nonfarm payrolls to moderate to a 175k pace after registering a robust 209k gain in July, which left the six-month average little changed at 179k.

Key Quotes

“While data are limited so far for the month of August, the past trend in survey and hard data indicators point to job growth well above its breakeven pace of roughly 100k. In August, we call for a small deceleration led by private services, which picked up by a strong 183k in July, and a potential contraction in mining jobs in line with the decline in rig counts. Manufacturing jobs are expected to maintain a steady pace near 10k.”

“We expect the unemployment rate to be unchanged at 4.3%, with risks balanced as further improvement in labor participation cannot be excluded in the near-term. On wages, we expect a 0.2% m/m increase, taking in account unfavorable calendar effects that may bias the monthly gain downward. This rise should nonetheless lead average hourly earnings slightly higher on a year-on-year basis to 2.6% vs 2.5% previously. Overall, the combination of solid job growth and a pickup in wage gains argues for a hawkish report, though the market response will be tempered by concerns over low inflation and near-term political risks.”

“Foreign Exchange

We see heightened two-way risks around the USD for payrolls, especially following a soft core PCE print. This is complicated by the subsequent ISM release later in the morning, although the payrolls report—and in particular, wages—will likely carry the tone for the day. We are inclined to believe that a broadly in line consensus print (as per our forecast) should stabilize the USD, with a bias to acquire a bid tone ahead of the long weekend focus should shift onto next week’s ECB meeting where we see a non-trivial risk of a dovish outcome. Because of this, FX markets may get nervous to reengage in EUR longs—especially as reports have surfaced greater discomfort with the EUR’s strength. As such, we think that a negative surprise in payrolls might lack an extensive follow-through on the USD and would look to acquire on a dip. And, while ADP is known to provide head-fakes for concurrent NFP releases, we think that even a modest upside surprise around 200k will see the USD extend a bid tone. Overall, we think EURUSD’s retracement from the 1.2070 highs remains incomplete.”