ADP NFP And ISM Manufacturing PMI Preview: Defensive Forecasts Leave Room For Surprises

• The ADP NFP and the ISM Manufacturing PMI serves as big hints towards Friday's jobs report.
• Expectations are for a downgrade in the data, leaving more room for upside surprises.
• The impact may be seen in the immediate aftermath and on Friday as well.

Two significant economic indicators are published on Wednesday, August 1st. Both serve as hints towards Friday's official BLS Non-Farm Payrolls. Apart from shaping expectations for the event, the data have an immediate impact on markets.

Private sector jobs

The ADP Non-Farm Payrolls report is due at 12:15 GMT. The biggest provider of private sector payrolls has a good sense of the economy and the publication impacts forecasts. In some cases, the correlation between the ADP number and the private sector component of the NFP has been weak, but the guidance is reliable enough.

ADP published a gain of 177,000 positions in June, slightly below expectations but well within the numbers markets got used to in the past few years. Projections for July are lower, at 175,000. This is in line with weaker expectations for the official number. It would take a more significant downfall, around 150,000 or lower to weigh on the US Dollar. An increase of over 200,000 would be USD-positive.

Forward-looking activity and inflation data

The ISM Manufacturing Purchasing Managers' Index for July is published at 14:00. The manufacturing sector is small, yet substantial. As US President Donald Trump said, the sector "makes things." The forward-looking gauge came out at a whopping 60.2 points in June, above expectations and an excellent figure on its own. Any score above 50 represents expansion and levels around 60 already reflect robust economic activity. 

Also here, a small downgrade is expected: to 59.8 points. And also here, the lower expectations mean that there is more room for an upside surprise. If the score remains above the round number of 60, it would be good news for the greenback.

The ISM Manufacturing report consists of another critical component: Prices Paid. This gauge of inflation is gaining importance. According to economic textbooks, rising employment is supposed to create inflationary pressures, but these have been minimal according to the hard data. Nevertheless, this survey does note inflation in the pipeline. The Price Paid component stood at 76.8 points in June, a very high level. And no surprises: a small downgrade is also expected here, to 76.8 points.

Reaction function and the Fed

The most significant event of the day is the Fed decision due at 18:00. They are not expected to raise rates at this juncture, but the data will be used in their deliberations. Fed Chair Jerome Powell and his colleagues want to see ongoing jobs growth, high economic activity and also rising prices to justify the path of gradual rate hikes.

So, in a sense, the data will also shape expectations for the Fed meeting. On the other hand, it may also limit the reaction. The greenback will likely move after the figures, but may relatively quickly hold steady in anticipation to the FOMC decision. 

A quick reaction followed by a stalling of price action is probably not the end of the story for these two data points. 

After the dust settles from the Fed decision, the numbers will have their say once again, especially on Friday. If both are upbeat, NFP expectations will rise. If they both disappoint, NFP projections could suffer a downgrade. 

Conclusion

All in all, August 1st is set to be a busy day in markets. The ADP NFP and the ISM Manufacturing PMI are set to move markets on their own and further impact the NFP on Friday. In between, the Fed decision may limit the time that market reacts in the immediate aftermath of the release.