NFP Preview: Will markets’ optimism on key data be right?

The majority of economists tend to be more optimistic when it comes to the number of jobs added in the US last month. However, that could be an overcorrection due to continually underestimating the labour market’s strength this year. However, there are other elements that make forecasting Friday’s release a little more challenging, increasing the likelihood of market volatility.

Several significant pre-NFP labour data points have been delayed as a result of the holidays earlier in the week. ADP and JOLTS data are included in this. Due to the reasons why the number of jobs has constantly been overestimated, the latter is especially crucial. As attention shifts to the labour market, all of this raises expectations for what the Fed would do in upcoming sessions.

The US labor market is in a somewhat unique situation, which we’ve been talking about all year. The number of open job spots far exceeds the number of people looking for work. That means that NFP numbers don’t depend so much on economic factors, as personal decisions, which can be more arbitrary.

For instance, the US unemployment rate is not distributed evenly. With a 1.9% unemployment rate, Nebraska, like the Dakotas, is in dire need of labour. With scant work possibilities, California and the District of Columbia have the highest unemployment rates. However, individuals are hesitant to relocate from cities to rural areas where there are open positions.

But, people are reluctant to move from the cities to the rural areas where there are vacancies. Just how many people decide to uproot and move isn’t a factor that is consistent, or economically predictable, since the reasons for staying or moving are often personal.

Future trends
The last JOLTS release showed that the number of open jobs actually increased, widening the gap between openings and seekers. If that pattern persisted through late spring, then that could exaggerate the problem of accurately predicting the NFP number this time around.

The Fed, which has thus far largely concentrated on inflation, is the other element. That is, disobeying the requirement to sustain full employment in the second portion of its mandate. The labour market is tight since the unemployment rate has been persistently below the structural level. As a result, labour expenses rise, which may result in consistently high inflation. This issue is one that Fed officials are raising more frequently, which may be a sign that the Fed will continue raising rates even when inflation approaches its goal.

What the numbers show
According to expectations, the June NFP will total 250K, down from the 339K reported in the previous month. But with the participation rate remaining unchanged, the unemployment rate is predicted to hold steady at 3.7%.

Where focus could be turning to is the average hourly earnings, which are forecast to show growth of 4.1% annual, compared to 4.3% prior. The issue is that inflation was last reported at 4.0%, meaning that labor costs could soon be rising faster than inflation. The Fed is likely to see that as a problem, and therefore markets could react more to this figure. Higher labor costs would imply a higher chance of Fed hikes in the future.