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Research Note: January NFP Prep

Highlights


By: Matt Weller, CMT, Senior Technical Analyst

The January Non-Farm Payroll report will be released tomorrow at 8:30 ET (13:30 GMT), with expectations centered on a headline could print below these expectations, with leading indicators suggesting a January headline NFP reading of just 186k.

The model has been historically reliable, showing a correlation coefficient of .90 with the unrevised NFP headline figure dating back to 2001 (1.0 would show a perfect 100% correlation). As always, readers should note that past results are not necessarily indicative of future results.

 

Source: Bureau of Labor Statistics, FOREX.com

Every one of the four labor market indicators tracked by the model deteriorated last month. The Manufacturing and Non-Manufacturing PMI Employment components both dropped notably, by 2.7% and 4.4% respectively, back to modest growth territory. Meanwhile, ADP deteriorated from last month’s initial reading of 241k down to 213k, and initial jobless claims spiked up to 308k in the survey week, though they’ve since moderated back to sub-300k levels. The resulting 186k forecast is the model’s lowest since May of last year.

Trading Implications

Over the past few months, we’ve repeatedly noted that the Fed has pivoted from prioritizing employment to focusing on inflation, especially with the concerning (from an inflationary perspective) drop in oil prices. As a result, there are a broad range of NFP outcomes that could be deemed “acceptable” by the market. Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:

NFP Jobs Created

Likely USD Reaction

Likely Equity Reaction

< 180k

Bearish

Slightly Bullish

180k-300k

Neutral

Neutral

> 300k

Slightly Bullish

Slightly Bearish

Instead of focusing exclusively on the overall quantity of jobs, traders should also monitor changes in the quality of those jobs. In particular, the market will be hyper-focused on the average hourly earnings measure of wages, which shocked traders with a surprise 0.2% m/m decline last month. Historically, USD/JPY has one of the most reliable reactions to payrolls data, so traders with a strong bias on the outcome of the report may want to consider trading that pair.

Though this type of model can provide an objective, data-driven forecast for the NFP report, readers should note that the U.S. labor market is notoriously difficult to foretell and that all forecasts should be taken with a grain of salt. As always, tomorrow’s report may come in far above or below my model’s projection, so it’s absolutely essential to use stop losses and proper risk management in case we see an unexpected move. Finally, readers should note that stop loss orders may not necessarily limit losses in fast-moving markets.

By: Neal Gilbert, Senior Market Analyst

This month my Non-Farm Payroll model is forecasting a slightly higher-than-consensus 251k increase in jobs in January 2015, which would almost match exactly the better-than-anticipated release from last month. If this were to be the result, it would continue the hot streak that US data has been enjoying as NFP has been north of 200k (including revisions) for ELEVEN STRAIGHT MONTHS, a feat that was last seen from 1993 to 1995 when there were 19 straight months of 200k results.

A result like the one my model is forecasting would be tantalizingly fascinating due to the USD squeeze we have been seeing during the week leading up to the all-important NFP figure. While few pundits are predicting an all-out crash for the dollar after a few days of short squeezes, a strong NFP could reverse the squeeze violently. Currencies that have been benefiting from this squeeze (AUD, NZD, EUR, and GBP) aren’t really dealing from a position of strength considering their central banks are either dovish or neutral, so the squeeze could end with one strong blow from NFP. In addition, the usual measure of USD strength or weakness, the USD/JPY has been ranging for weeks, which leads me to believe that the squeeze could be short lived and rather painful for those who have bought into it.

Using my forecast model had previously required me to take last month’s result and either add to or subtract from it based on ten employment reports released before NFP; however, all of the weather related craziness in the first quarter of 2014 created a challenge to that doctrine in that previous results were anticipated to be revised substantially higher. While that anticipation turned out to be inherently incorrect, my forecast was actually fairly accurate utilizing the average calculation. Therefore, I will continue to repeat the method of using a three-month average which takes into consideration the possibility of a revision. So instead of using 252k as my base (last month’s result), it will now be 289k (an average of 262k October, 353k November, and 252k December).

Here is the breakdown of the leading employment reports:

Leading Event

Current Release

Previous Release

Good or Bad for NFP?

ADP Employment Change

213k

253k

Bad

ISM Non-Manufacturing PMI Employment Subcomponent

51.6

55.7

Bad

Markit Services PMI Employment Subcomponent

Further solid rise.

Weakest rise in 8 months.

Good

ISM Manufacturing PMI Employment Subcomponent

54.1

56.0

Bad

Markit Manufacturing PMI Employment Subcomponent

Picked up slightly.

Moderated.

Good

Initial Jobless Claims 4-Week Moving Average

292.75k

290.5k

Bad

Challenger Job Cuts

53,041

32,640

Bad

Continuing Jobless Claims

2.4M

2.452M

Good

ISM New York Employment Subcomponent

55.4

56.8

Bad

Chicago PMI Employment Subcomponent

Driven to a 14-month high.

Increased.

Good

Overall

 

 

Bad

 

As you can see from the table above, six out of the ten pre-NFP employment figures showed a worse result than the month before, but they also collectively weigh more heavily in my model. Taking all these results together, I came up with my NFP estimation of 251k new jobs created in January 2015. This is slightly better than the consensus estimate of 230k-240k, and could prompt the USD to gain back some ground it has lost this past week as investors go back to believing in the US economic recovery and Federal Reserve hawkishness.

In addition to the NFP headline and previous month’s revisions, the market may concentrate on the Average Hourly Earnings almost as much as the NFP result.  Outside of the US, the rest of the developed world seems to be hyper-concentrated on lack of inflation, which is a reason most are leaning dovish, and if Earnings don’t recover from last month’s -0.2% disaster, the Fed may have to join them. The initial reaction is likely to be as a result of the headline though with the other factors increasing in significance as US stocks open for trade. Therefore, if my forecasting model presumes correctly, I would expect to see a stark turn down in squeezed currencies like the AUD/USD, NZD/USD, EUR/USD, and GBP/USD, despite the fact that they don’t usually have the most logical reaction to NFP releases.

Month

Consensus

Matt’s Forecast

Neal’s Forecast

Actual Result

Matt’s Discrepancy

Neal’s Discrepancy

June 2013

167k

101k

167k

175k

66k

8k

July 2013

163k

126k

221k

195k

69k

26k

Aug. 2013

184k

170k

253k

162k

8k

91k

Sept 2013

178k

172k

162k

169k

3k

7k

Oct. 2013

182k

180k

191k

148k

32k

43k

Nov. 2013

121k

116k

135k

204k

88k

69k

Dec. 2013

182k

185k

222k

203k

18k

19k

Jan. 2014

196k

184k

277k

74k

110k

203k

Feb. 2014

185k

160k

126k

113k

47k

13k

Mar. 2014

150k

131k

151k

175k

44k

24k

Apr. 2014

199k

164k

150k

192k

28k

42k

May 2014

216k

205k

217k

288k

83k

71k

June 2014

214k

184k

248k

217k

33k

31k

July 2014

214k

217k

268k

288k

74k

20k

Aug. 2014

231k

206k

262k

209k

3k

53k

Sept. 2014

226k

220k

277k

142k

78k

135k

Oct. 2014

215k

221k

247k

248k

26k

1k

Nov. 2014

235k

232k

278k

214k

18k

64k

Dec. 2014

231k

213k

186k

321k

108k

135k

Jan. 2015

241k

237k

322k

252k

15k

70k

Average

 

 

 

 

47k

57k

For more intraday analysis and trade ideas, follow us on twitter (@FXexaminer, @MWellerFX and @FOREXcom).



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