US June Payrolls: Jobs growth set for a modest bounce - TDS

Research Team at TDS, expects the sharp downdraft in US employment to partially reverse in June, with a forecasted increase of 175k jobs.

Key Quotes

“This print will be supported by the return of 34k Verizon workers who were on strike in May. In addition to the rebound in the telecom sector, a bounce back in the wholesale, manufacturing and construction sectors should also bolster the headline print.

The unemployment rate is forecast to increase to 4.8% from the cycle-low of 4.7% on account of an expected rebound in the labor force (following the outsized 820K decline over the prior two months), which should more than offset the gains in household employment. On the wage growth front, average hourly earnings are expected to rise modestly, posting a 0.2% m/m gain, resulting in the pace of wage growth accelerating from 2.5% to 2.7% y/y due in large part to favorable base effects.

Despite the forecasted rebound in headline employment in June, the wider backdrop for the labor market remains soft. Relative to the brisk pace set earlier this year, we anticipate the trend pace of hiring to slow over the coming months in reflection of a labor market that is approaching full capacity. While this is a welcome development for the Fed, their focus is elsewhere as concerns over low inflation and the risk to growth from global shocks dominate.

Foreign Exchange

We think FX markets are still digesting (and struggling) with what the implications of the UK voting to leave the EU bloc. As such, we do think this has somewhat desensitized markets to the data at this point in time. For this reason, we are reluctant to believe that the market will hit a runaway bid given that we expect the underlying tone to be on the soft side (see above).

That said, we have turned moderate USD bulls over the medium-term following the developments across the pond, but we emphasize this will be a process rather than a singular event as capital is reallocated globally. Moreover, should the payrolls data disappoint, we think USD dips will be shallow as expectations for the Fed are already very much priced out the curve so look to buy the dip.

We like buying dips in USDCAD in particular, and with tomorrow’s Canadian employment report expected to be stronger than consensus, we think support of 1.2880/90 followed by 1.2850 should hold and eventually bought.”