Forecasters expect the U.S. nonfarm payrolls report due on Friday to show the pace of job creation slowed in June, while wage growth also moderated.

According to estimates from a foreign media survey, non-farm payrolls may have increased by 190,000 last month, and average hourly earnings are expected to increase by 3.9% year-on-year, the lowest level in three years. In addition, the unemployment rate is expected to remain at 4%, the highest level in more than two years.

A cooling labor market will support Federal Reserve policymakers seeking multiple rate cuts this year. Investors now generally believe the Fed will cut rates at its September and December meetings. Economists Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou wrote:

“The headline employment data may suggest that the Fed can be patient in cutting rates, but the recent rise in unemployment suggests a stronger urgency. We think the Fed will have enough evidence to start cutting rates at the September FOMC meeting.”

The nonfarm payrolls report includes two surveys: one for businesses, which determines wages, and one for households, which is used to calculate the unemployment rate. The two surveys have diverged widely this year, with business surveys showing healthy labor demand and household surveys not.

Many Fed officials have highlighted the surprisingly strong growth in nonfarm payrolls so far this year. A gain of less than 200,000 would bring the data more in line with household survey data.

For the growth of wages, forecasters expect average hourly earnings to increase by 0.3% in June from the previous month, after an unexpected increase of 0.4% in May. The latest wage data may bring the annual increase in wages below 4% for the first time, reinforcing the market's confidence that US inflation will continue to slow.

Economists expect the report to show the unemployment rate remained unchanged at 4% and the labor force participation rate rose to 62.6%, reversing declines in May, which were concentrated among people aged 20 to 24 and 55 and older. The so-called "prime working age" participation rate, or the participation rate for the 25 to 54 age group, rose in May to its highest level since 2002.

“The weakness in the May household survey result was driven almost entirely by a sharp drop in employment in the 20-24 age group,” Stephen Stanley, chief economist for the U.S. at Santander Capital Markets, said in a July 3 note. “I expect the May anomaly to be corrected in June, with a sharp rebound in the participation rate.”

Regarding the market reaction, analysts at BNP Paribas believe that the market's reaction to non-farm payrolls data may be asymmetric. After the core PCE inflation rate rose slightly by 0.1% last month, the smallest increase since November last year, the market's reaction to non-farm payrolls data that is lower than expected may be greater than the reaction to data that is better than expected.

If both inflation and employment soften, it would spark a larger debate about whether the data is rebalancing or starting to deteriorate. A weaker-than-expected NFP -- especially if accompanied by a rise in unemployment -- could cement market pricing for two Fed rate cuts in 2024 and force a reassessment of already elevated terminal rates. Meanwhile, while an upside surprise in the data would lead to a sell-off in rate expectations, the accompanying steepening would be limited as the Fed maintains its accommodative bias given the good recent progress on inflation.

Matt Simpson, senior analyst at City Index, said, "The weaker-than-expected ISM services report was the gift that Fed doves had been waiting for before the release of the non-farm payrolls data. If the non-farm payrolls data confirms the economic cracks we are seeing elsewhere, gold has the potential to rise to $2,400. My guess is that the US dollar index will not retest 106 in the short term, so we expect traders to avoid trading the rebound in the US dollar and buy gold on dips."

The article is forwarded from: Jinshi Data