Downside Risk Abounds


By: Andria Pichidi

The focus today is squarely on the release of the June US employment report.

The downside risk abounds for June US Employment. The June Nonfarm payroll is expected to rise by 160K, after the disappointing 75k increase in May. Meanwhile, a steady jobless rate is expected alongside gains of 0.2% for hours-worked and 0.3% for hourly earnings. The June estimate is just below the 164k year-to-date average, and well under the 223k average in 2018.

The downside risks are seen in initial claims as auto retooling begins, and producer sentiment indicators have also shown a June pull-back. The vehicle sector should be a drag as well, as both the assembly rate and vehicle sales take back some of their May gains.

The 160k nonfarm payroll forecast assumes a 150k private jobs increase. Goods based employment should grow by 10k in June, after an 8k rise in May. Construction employment is seen adding 10k, after gains of 4k in May and 30k in April, while factory jobs should be unchanged, after a 3k May increase and a 5k rise in April. We assume private service job growth of 150k in June, after a weak 82k gain in May.

Hourly Earnings

The wide anticipation presents a 0.3% increase in June average hourly earnings, after a 0.2% increase in each of the preceding three months. A 3.2% y/y increase is projected in June, up from 3.1% in May but matching the pace of April and March, versus 3.4% in February. Growth in hourly earnings is gradually climbing from the 2% trough area between 2010 and 2014. The ECI report is expected to reveal a 0.7% Q/Q rise in Q2, with a y/y rise of 2.8%, matching the 2.8% Q1 y/y gain, versus a 1.4% cycle-low in Q4 of 2009.

FX Markets

The Dollar has been traded firmer into the London interbank open, edging out a 3-day high against the Yen and making moderate advancements against the Euro, Canadian Dollar, and other currencies. Similarly to the miss of ADP jobs report, a reading on NFP today lower than forecast could add pressure on USD Dollar.

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