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The ISM Manufacturing Index generally meets expectations, slightly falling from 61.2p to 60.6p in June. Everything above 50p corresponds to expansion, and it has never been possible to maintain the index level above 60p for a long time, so some slowdown is quite natural and cannot cause concern.
The US economy is growing for the 13th month in a row, and the sub-index of new orders was 66p, which indicates the stability of this growth. But before the publication of the employment report, it can be recalled that the employment sub-index declined from 50.9 p to 49.9 p, that is, there is no expansion of the labor market. Companies are trying to meet the growing demand, but there are a number of objective difficulties, namely the quality of the workforce does not allow filling all the vacancies that arise. In other words, there are not enough specialists who are able to perform work a little more complex than a handyman. As many respondents note, this is currently the main problem in the US labor market, which can lead to a slowdown in growth rates.
Nevertheless, the ISM index collectively indicates that there is little danger of seeing a weak employment report.
The ADP data on employment in the private sector, which is another significant report, can also be considered positive – 692 thousand new jobs were created. This is the second-largest result over the past 9 months, and the increase is observed in all sectors of the economy, including the manufacturing sector.
There is no direct connection between ADP and Nonfarm. There have been cases when a weak ADP report preceded very strong Nonfarm data and vice versa. This happens due to the specifics of accounting. Nevertheless, there is still a correlation, and a strong ADP report increases the chances of strong Nonfarms today.
Another indirect indicator is the number of applications for unemployment, which can move in one direction or another, but it still shows a general trend. As of June 25, the number of new applications fell to 364 thousand. This is the minimum since the beginning of the pandemic, which is a positive signal for Nonfarm data.
Therefore, it can be assumed that today's US employment report for June has a good chance of being slightly more positive than forecasts, or at least in line with them.
Why is there such close attention to this report? In fact, it will determine the mood of the FOMC members at the next meeting on July 28. At the moment, an unstable balance of opinions remains among the Committee members – on the one hand, it is time to give signals about the imminent curtailment of soft monetary policy due to the threat of rising inflation and good recovery rates, on the other hand, growth is still extremely unstable, and too early tightening can lead to the opposite effects expected.
Accordingly, if new jobs are created at the level of 600 thousand or lower, this will be an argument for those who suggest not to rush with tightening, which means that there will be no hawkish signals from the FOMC until September. On the contrary, if 1 million new jobs or more are created, such a result may provoke Fed members to hint at an early reduction in the pace of purchases under QE, and investors to revise their rate forecasts.
The former head of the Federal Reserve Bank of New York, Dudley, gave a comment to Bloomberg, in which he suggested that a rate increase before the end of the QE program is unlikely, since it will not make political sense. This means that changes in the rate forecasts should be expected only after the reduction of asset purchases begins.
In general, it can be assumed that the US dollar will not strongly strengthen today after the publication of Nonfarm. There may be a short-term bullish pressure that will lead to a strengthening of the US dollar, followed by profit-taking. It is worth noting that the national currency is not yet ready to further rise. The Fed is holding back overly optimistic expectations and is clearly not ready to deprive itself of the entire range of tools, and so, today's possible comments by FOMC members will be cautious, regardless of the Nonfarm result.
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