Dollar Soars As Traders Position For NFPs

The U.S. dollar traded sharply higher against all of the major currencies on Thursday with USD/JPY closing above 110 for the first time since April which is a sign that investors are positioning for a strong report. Last month’s jobs number was abysmal with U.S. companies adding only 266K new workers. Economists are looking for job growth to more than double in May but the problem is that other U.S. indicators favor a softer report.

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Although weekly jobless claims fell below 400K for the first time since the pandemic began and ADP reported a very strong increase in private payrolls, continuing claims ticked up and the acceleration in service sector activity was not accompanied by stronger job growth. Instead, the employment component of non-manufacturing ISM dropped to 55.3 from 58.8. Challenger reported more layoffs while consumer confidence declined according to both the Conference Board and University of Michigan reports.

Arguments in Favor of Stronger Non-Farm Payrolls

1. ADP Employment Change rises 978K, up from 654K
2. 4 Week Average Jobless Claims drops to 428K from 562K

Arguments in Favor of Weaker Non-Farm Payrolls

1. Employment Component of ISM Services Declines
2. Employment Component of ISM Manufacturing Declines
3. University of Michigan Consumer Sentiment Index Declines
4. Conference Board Consumer Confidence Index Declines
5. Challenger Reports rise in Job Cuts in May
6. Continuing Claims rise 3.77 million from 3.68 million

Yet the greenback ignored these disappointments and held onto its gains because investors believe that these softer releases were baked into April’s numbers. A large subset of traders are looking for the difference to be made up in May with a whisper number of more than a million jobs. The ISM non-manufacturing index hit a record high, a sign that service sector activity is very strong. The recovery continues to be fueled by pent-up demand and it should only be a matter of time before the jobs report reflects that. Right now some businesses are struggling to find workers because wage growth is slow but eventually businesses that need employees to meet rising demand will need to pay more. Nearly half of US states are planning to cut off enhanced federal jobless benefits as soon as next week which should draw workers back to the workforce.

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