Special News Alert, Get ready for green tomorrow,
Research Note: May US Employment Report-Friday, June 3, 2011
Summary Outlook
Tomorrow, Friday June 3, at 0830ET/1230GMT, will see the release of the May US Employment Report, along with revisions to the March and April surveys. Consensus estimates are for an increase in non-farm payrolls (NFP) of +170K (prior +244K) and a dip in the unemployment rate to 8.9% (prior 9.0%), according to Bloomberg surveys of 88 economists. Estimates range from +65K to +250K for NFP. However, following Wednesday's weaker-than-expected ADP private payroll data (+38K vs. expected +175K), many economists revised their forecasts lower. Of those who did, the consensus forecast is now for a NFP change of around +120K, and we think this will be the benchmark markets use to gauge the strength of US job creation. Recent US data point to a slowdown in US hiring, in our view, but the question will be 'how much?' We think a NFP change above +150K will be interpreted as 'not that bad' and may see risk assets rebound (stocks, commodities, USD/JPY and other JPY-crosses higher/USD lower), while a NFP gain of less than +100K will likely be interpreted as 'worse than expected,' potentially seeing risk assets sell-off. The prior months' revisions will be critical for gauging the degree of any hiring slowdown; we will ignore any changes to the unemployment rate due to mixed signals in that data series.
Trading Strategy
After the disappointing ADP report, markets suffered a spasm of pessimism and stocks and other risk assets sold off sharply on Wednesday. Thursday saw some stabilization, but overall we think markets are now positioned for a weak NFP number and potential further weakness in risk assets. Perhaps counter-intuitively, this shifts the event's risk to a 'better than expected' NFP reading (NFP +150K or better), confounding the bears and pessimists and possibly triggering a strong rebound in risk assets. We think it will take a NFP change of +75K or less to see the risk sell-off extend its decline, given the sell-off that has already occurred. We think the USD remains vulnerable and is likely to suffer in either scenario, as weaker US job creation undercuts the strength of the US recovery, while better job creation will embolden risk sentiment and reduce safe haven demand for US Treasuries and the greenback. As such, we think USD strength in the post-NFP reaction around 50-80 pips from pre-NFP price levels may offer more advantageous levels to establish short USD positions.
