Synopsis:

ANZ projects potential downside risks for the upcoming U.S. Nonfarm Payrolls (NFP) based on recent employment trends and weak April PMI data. Meanwhile, the upcoming Federal Open Market Committee (FOMC) meeting could provide modest support for the USD, though much of the hawkish sentiment may already be priced in.

Key Points:

• Weakening Employment Indicators: ANZ points out discrepancies in U.S. employment data, with the household survey suggesting weaker conditions than the headline nonfarm payrolls figures. The April Flash PMIs employment composite index dipped below 50, marking the lowest point since June 2020 and indicating significant softening in employment, which could foreshadow broader economic slowdowns.

• PMIs and Payroll Trajectory: While PMIs have not consistently predicted monthly payroll outcomes, ANZ notes that they generally track the broader trends in employment changes. The recent sharp decline in the employment index is particularly concerning as it might signal a forthcoming downturn in payroll numbers.

• Upcoming Employment Data: Further insights will be required to confirm these trends, with additional data points such as the Conference Board’s job differential gauge anticipated this week. These metrics will be crucial in solidifying expectations for the labor market ahead of the official payroll report.

• FOMC Meeting Outlook: The FOMC's stance appears modestly supportive for the USD, driven by a shift toward more hawkish commentary from Fed officials during the pre-meeting blackout period. However, ANZ suggests that market pricing likely already reflects expectations for any hawkish statements from Chair Powell.

• USD Strategy: Given the potential for weaker payroll data and the anticipated impact of the FOMC meeting, ANZ leans towards a softer USD outlook heading into next week’s labor market update.

Conclusion:

With key employment data on the horizon and the FOMC meeting set to take place, ANZ advises caution regarding the USD's position. Investors should prepare for potential volatility in the currency markets, particularly if employment indicators continue to show weakening and if the FOMC's support does not exceed market expectations.