❗ What to expect from July's NFP report?

NFP report for July is a key economic release of the week. US jobs data will be released on Friday, 1:30 pm BST and will be closely watched by market participants. The Fed continues to play down inflation pick-up, saying that it is now paying the most attention to labour market data. Median estimate points to a 870k jobs increase in July but other data for July that has been already released was inconclusive. Take a look at our preview of the event!

Key data for the Federal Reserve

US inflation continues to run hot and concern economists and other market participants. However, the official message from the Fed is that price growth is transitory and will subside next year. Meanwhile, US central bankers will focus on the jobs market as it better reflects the pace of the post-pandemic recovery. The Fed has been dovish in the past months but some dissidents surfaced recently and began sending somewhat hawkish messages. Vice President Clarida said that the first rate hike could come by the end of 2022 or at the beginning of 2023. While this is still a distant future, it is the most precise outlook markets have offered in months, and it comes from one of the top figures at the Federal Reserve. However, in order to cement those expectations a string of upbeat jobs reports would be needed.

Other data for July turned out to be mixed

This is why the upcoming NFP report will be closely watched. Market expects a 870k jobs addition in July, following an 850k increase in June. However, jobs-related data released earlier this week has been rather inconclusive. ADP report released on Wednesday showed a big miss with data coming in at 330k (exp. 700k). On the other hand, ISM employment subindices jumped back above 50 in July. ISM manufacturing employment subindex jumped from 49.9 to 52.9 while services ISM employment sub index moved from 49.8 to 53.8 pts. In both cases, data turned out to be better than expected.

Overestimated impact of end to unemployment benefits?

What does it tell us? Not much. However, it should be noted that high estimates for July's NFP may result from soon-expiring unemployment benefits. In fact, 26 states have already ended federal benefit programmes (official deadline for federal programs to expire is September 6). Nevertheless, the impact of those may have been overestimated. According to a report from US payroll company UKG, there was no evidence of quicker return to the labour market in states that have already ended benefit programmes. Report claims that virus fears and early retirement programmes are the main reason why people are not returning to work. Having said that, there is a scope for some disappointment tomorrow.

Market reaction

However, does this mean that the market may be negatively impacted? Not necessarily. Investors got accustomed to treating bad news like good news. Why? Because it allows the Fed to keep its loose policy for longer. While knee-jerk reactions were mixed in past months, US indices usually ended the day higher following either NFP misses or beats. Situation looks similar on the FX market - EURUSD moved higher after 8 out of previous 12 releases while 6 out of those 12 releases turned out to be better-than-expected (and 6 were negative surprises). It will be key how the data is viewed in terms of Fed's policy. Markets rumour that the upcoming Fed symposium in Jackson Hole (August 26-28, 2021) could be used by Powell to signal a slight hawkish turn but a solid labour market reading would be required.

EURUSD pulled back from the resistance zone marked with 61.8% retracement of the downward move launched in late-June (1.1890 area). Subsequent pullback was halted at the 38.2% retracement, which more or less coincides with the lower limit of local market geometry. The pair has moved higher following 8 out of 12 previous NFP releases and the performance of EURUSD was not determined by beats or misses. Source: xStation5