At the end of the trading week, as it is accustomed in the first Friday of each new month, the Non-Farm Payrolls data will show the state of the U.S. labor market. Since the February-April lockdowns and the subsequent job losses, the U.S. added millions of jobs each month that followed.
However, the labor market still shows signs of weakness. Most of the ones that came back to work were employees on temporary leave. Hence, the jobs are not newly created, but they were “frozen” for a while.
Moreover, all these months since May, the trend of permanent job losses is on the rise. If one looked behind the headlines, every month since May, the permanent job losses rose, despite the headline pointing to millions of new jobs being created.
Furthermore, if we do some simple math and compare the 22 million jobs lost in February-April with the ones created in the months to follow, we note that there is still a huge gap that remains to be filled.
What to Expect From This Friday’s NFP?
This particular NFP release may not mean much for financial markets. Not that the number is not important, but the focus at this point sits on European inflation data and the U.S. election.
As such, the NFP missing expectations or not should come as secondary in importance. The market will react but mostly triggered by high-frequency trading algorithms programmed to make the most of a quick market move.
The expectations are that the U.S. will add another 900k jobs in September. However, this is the average, with the risk being tilted to the downside.
Oxford Economics predicts that the NFP will only show the U.S. economy adding 600k in September, following the 1.4k jobs added in August. At this rate, the level of employment remains well below the pre-pandemic level, by about 7%.
Slow growth in economic activity is likely to affect the jobs created in September. The market will also focus on the unemployment rate, as the Fed indicated many times lately that high employment levels remain on its priority list.
As mentioned at the start of this article, do not expect much in terms of a clear market direction from this week’s NFP. Instead, look for new positioning for the week ahead as we enter the last trading hours next Friday.
If European core inflation, to be released next Friday before the NFP, will drop below the previous 0.4%, traders will use any bounce in the EURUSD given by a weak NFP to establish short positions for the upcoming dovish headlines from the ECB. And if the EURUSD turns, the USD turns too.