"Nonfarm payroll growth likely slowed to a still healthy 165,000 for the month of July, down from the robust 287,000 clip in June. Our forecast would leave the 3-mo moving average at 154,000, indicating progress in the labor market, albeit at a slower pace. Recent low readings for initial jobless claims and the improvement in the conference board labor differential (jobs plentiful - hard to get) are supportive. Looking at the various goods sectors, we expect a rebound in construction jobs, supported by momentum in the housing market, while mining and manufacturing should remain soft. Services sector hiring likely remained solid. The recent volatility in the nonfarm payrolls data has been unusual. Part of the big swing from May to June owed to the end of the Verizon strike. There was also a 5-week gap between survey periods, which is perceived to create an upward bias. In prior analysis, we found a small difference supporting the claim, but it was not statistically significant. In our view, the strong June reading was primarily a positive payback after abysmal job growth in May, and we should see a return to a more sustainable clip this month.

We anticipate no change in the unemployment rate at 4.9%. The risk is that we see further recovery in labor force participation, which increased to 62.7% from 62.6% in the last report, thereby putting upward pressure on the unemployment rate. We also think we are due for stronger growth in household jobs given the last few months of weak readings. Average hourly earnings should rise 0.3% mom in July, accelerating from 0.1% in June. Yoy wage growth would be unchanged at 2.6%.

FX: Fed cautious optimism USD-supportive, helped by overseas easing

The Fed's incremental optimism in the July FOMC statement will help to protect but not extend dollar gains since the June meeting, in our view. The diminished risks the Committee sees and improved commentary on the economic outlook suggests September remains a live meeting in contrast to market pricing. While the USD sold off in the wake of the statement, we think the USD will remain supported with the market underpricing the risk of a September hike, assuming global financial conditions remain subdued. The coming two employment reports will be key in this regard.

The healthy 165,000 print we see in this week's report will leave the 3mma at a still robust 154,000. Combined with a stable unemployment rate and robust 0.3% average hourly earnings, the report will confirm the Fed's view that continued labor market tightening supports gradual policy normalization. The USD will respond positively with the market currently pricing a 20% chance of a September hike".

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