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The key issue surrounding today’s June US Nonfarm Payrolls report is whether or not the US labor market is improving enough to reduce labor market slack and push up wage growth (which should help inflation), in order to justify the Federal Reserve hiking rates again before the end of of 2017.

As it stands today, markets don’t think another hike is coming: Fed funds futures are pricing in March 2018 as the most likely period for the next move. Market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed’s defintion of “full employment” (at 5% or lower) since for October 2015.

Current expectations for today’s data remain are modest after disappointing ADP and ISM Services figures earlier in the week, with the unemployment rate expected to hold at 4.3%, and the headline jobs figure to come in at +177K. Wage growth is due in around +2.6% y/y, below the +2.8% figure seen earlier this year, which was near a seven-year high. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 89% of the changes in the NFP figure (R^2 = 0.89). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +155 to +180K.

It’s important for the US Dollar that there is a rebound in the headline NFP figure after May’s disappointing +138K reading. Per the Fed minutes released on Wednesday, officials believe that data weakness at in the first half of the year was ‘transitory,’ so a strong showing by the US labor market report today will do well by the greenback to confirm this point of view (and help reset market expectations closer to what the Fed says it wants to do).

The big picture: so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.3% through the end of 2017 (as per Fed Chair Janet Yellen’s commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +118K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.3%.

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