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    NFP Prep: Could Wage Data “Break the Inflation Tie”?

    The May Non-Farm Payroll report will be released on Friday at 8:30 ET (12:30 GMT, 1:30 BST), with expectations centered on a headline print of 226k after last month’s solid bounce back to 223k. My model suggests that the report could meet these expectations, with leading indicators suggesting a May headline NFP reading of 219K.

    The model has been historically reliable, showing a correlation coefficient of 0.90 with the unrevised NFP headline figure dating back to 2001 (1.0 would show a perfect 100% correlation). As always, readers should note that past results are not necessarily indicative of future results.


    Source: Bureau of Labor Statistics,

    Three of the four labor market indicators we follow improved last month. The ADP Employment report edged back up to 201k after the 169k reading last month, while the volatile weekly jobless claims report dropped back down to 275k (from 296k) in the survey week, indicating fewer layoffs in May. The employment subcomponents of the ISM PMI reports were a mixed bag, with Manufacturing employment breaking back into growth territory at 51.7 (from 48.3) while Services employment dipped 1.4 points to 55.3.

    Trading Implications

    With many traders eyeing September as a likely time for the Federal Reserve to start hiking interest rates, the jobs report will be interpreted through the lens of monetary policy. Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:

    NFP Jobs Created

    Likely USD Reaction

    Likely Equity Reaction

    < 175k


    Slightly Bullish


    Slightly Bullish


    > 250k


    Slightly Bearish

    Instead of focusing exclusively on the overall quantity of jobs, traders should also monitor changes in the quality of those jobs. To that end, the change in average hourly earnings could be just as critical as the headline figure, as it could help “break the inflation tie” between the strong Core CPI report two weeks ago and Monday’s weak Core PCE report. If average hourly earnings come out hotter than the 0.2% m/m reading expected, it would strengthen the case for a September rate hike by the Federal Reserve. Historically, USD/JPY has one of the most reliable reactions to payrolls data, so traders with a strong bias on the outcome of the report may want to consider trading that pair.

    Though this type of model can provide an objective, data-driven forecast for the NFP report, experienced traders know that the U.S. labor market is notoriously difficult to predict and that all forecasts should be taken with a grain of salt. As always, tomorrow’s report may come in far above or below my model’s projection, so it’s absolutely essential to use stop losses and proper risk management in case we see an unexpected move. Finally, readers should note that stop loss orders may not necessarily limit losses in fast-moving markets.

    * Please note: The live trading sessions scheduled for June 5 and June 6 have been cancelled. They will resume as usual next month *

    For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom)

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