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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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