Why the Stakes Are Extra High for This Week's Jobs Report

Was May an aberration or confirmation of a loss of momentum?

How Will Brexit Uncertainty Impact Fed Policy & the U.S.?

June's U.S. jobs report, slated to be released on Friday morning, promises to heavily influence how investors, policymakers, and the electorate at large perceive the state of the U.S. economy as the presidential campaign heats up and markets grapple with aftershocks from the Brexit referendum.

"In our view, Friday's payrolls report will be even more closely watched than usual, as markets come to grips with a post-Brexit world and look for confirmation that the weak May non-farm payrolls report was a blip rather than the start of a new, worrying trend," write Bank of America Merrill Lynch FX strategists led by Athanasios Vamvakidis.

That line of reasoning and the reference to the lackluster 38,000 new jobs in May as a "blip" might be a charitable distribution of the burden of proof falling on this next report. May's jobs report — which was negatively skewed by a strike at Verizon Communications Inc. — brought the three-month moving average for non-farm payroll growth down to 116,000, its lowest level since July 2012. The onus might be on this month's number (and revisions to previous months) to halt to that slide.

NFP TCH Index (US Employees on N 2016-07-06 07-42-26
Source: Bloomberg

"Excluding the strike impact, job growth rapidly decelerated from an average 281,000 a month in Q4 to 196,000 in Q1, 121,000 in April, and 73,000 in May," writes Morgan Stanley Chief U.S. Economist Ellen Zentner. 

The consensus estimate for job growth in June is 180,000, according to analysts surveyed by Bloomberg.

In her recent testimony before Congress, Fed Chair Janet Yellen said that "without a doubt" an array of indicators pointed to a U.S. job market that's lost some of its mojo. On the other hand, Yellen noted that the central bank expects the labor market to tighten going forward.

And the one-off effect of the Verizon strike, which is expected to be reversed in this upcoming report, isn't the only reason to believe job growth in May was likely healthier than meets the eye, an argument made by San Francisco Fed Economist Mary Daly.

"There are good reasons to believe that the trend in payroll growth is slowing — strengthening wage growth at full employment is one," said Renaissance Macro Head of U.S. Economics Neil Dutta. "However, the trend is not collapsing. Consumers' confidence, jobless claims, hiring intentions and ISMs suggest somewhat healthier NFP growth than implied by the May figure."

After years in which employment grew at a faster pace than output, the Federal Reserve now has to at least consider the possibility that rather than GDP growth playing catch-up, job growth is slowing.

Conversely, slowing non-farm payroll growth may reflect an economy with a dearth of available labor, as suggested by the low unemployment rate, which fell to 4.7 percent in May, and a new cycle high for the Atlanta Fed Wage Growth tracker, which is up 3.5 percent annually.

While economists' opinions differ as to what the jobs data tells us about where we are in the U.S. business cycle, they did roundly agree that June's jobs report carries asymmetric risks for investors in light of the recovery in U.S. equities after the surprising shock of the June 23 vote by the U.K. to exit the European Union.

This time, bad news for the U.S. economy won't be good news for risk assets, analysts warned. Nor would good news on this front be enough to meaningfully move the dial on the market's expectations on Fed hikes over the near future, analysts suggested.

"The market is already pricing the Fed to be on hold despite forecasting a strong NFP rebound, because of Brexit-related risks, in our view," writes Vamvakidis. "In jittery markets, a miss in payrolls would likely see risk sentiment sharply affected."

"Should the data come in line with expectations, markets are apt to dismiss it as old, pre-Brexit news," added Zentner. "But should the data disappoint materially to the downside, markets will see it as cracks in the labor market that were deepening even prior to Brexit."

Steven Englander, global head of G10 FX strategy at Citigroup Inc., upped the ante on how much this jobs report will impact sentiment surrounding the U.S. economy and the Federal Reserve's ability to provide a remedy if the print comes in on the soft side.

Weak non-farm payrolls growth "would price more easing into the picture and put the USD into the same category as EUR and JPY," he asserts. "All G3 central banks would be wannabe-easers with considerable market skepticism on whether they could put anything effective on the table."

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