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    Research Note: Februrary NFP Prep

    Highlights


    By: Matt Weller, CMT, Senior Technical Analyst

    The February Non-Farm Payroll report will be released tomorrow at 8:30 ET (13:30 GMT), with expectations centered on a headline reading of 241k. My model suggests that the report could print a tick below these expectations, with leading indicators suggesting a February headline NFP reading of 220K.

    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

    The major labor market indicators tracked by the model generally improved last month. Service PMI Employment improved substantially, rising nearly five points from 51.6 to 56.4, though Manufacturing PMI Employment gave back three points (from 54.1 in January to 51.4 in February). On the bright side, the ADP Employment report showed a gain of 212k, while Initial Jobless Claims in the survey week dropped back down to 283k from last month’s unusually-elevated 308k reading.

     

    Trading Implications

    As ever, the jobs report will be interpreted through the lens of Federal Reserve policy. While the total number of jobs created is always important, the central bank has pivoted to focusing on inflation instead of inflation of late. Therefore, 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

    < 200k

    Bearish

    Slightly Bullish

    200k-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 surprised traders by rising at an elevated 0.5% rate last month. If wages continue to show strong growth, it could set the set the scene for the Fed to remove its patient pledge (before raising interest rates) at its policy meeting later this month.

    February also featured exceptionally cold weather and a abnormal number of winter storms in the economically vital Northeast US, so there may be some element of weather distortion in this month’s employment reading. Indeed, optimistic traders may even discount any initially disappointing figure as attributable to the poor weather, creating a potential “Heads I win, tails you lose” scenario for dollar bulls. 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 an extremely positive increase of 310k jobs in February 2015, which would be the best initial result since November’s 321k surprise.  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 TWELVE STRAIGHT MONTHS, a feat that was last seen from 1993 to 1995 when there were 19 straight months of 200k results.

    To be honest, when I initially calculated this result, I was a little skeptical; we’re just not used to seeing such strong initial figures since the Great Financial Crisis took hold in 2008.  However, after looking a little closer at late 2014, readings in the high 200s and low 300s are becoming more of the norm than the exception.  A result like that my model is forecasting would be likely very positive for the USD as it would seem nothing (not even a short month) can stop the streak the US economy is enjoying currently.  It would also increase the odds that the Federal Reserve could raise interest rates in the summer.

    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 257k as my baseline (last month’s result), it will now be 336k (an average of 423k November, 329k December, and 257k January).

    Here is the breakdown of the leading employment reports:

    Leading Event

    Current Release

    Previous Release

    Good or Bad for NFP?

    ADP Employment Change

    212k

    250k

    Bad

    ISM Non-Manufacturing PMI Employment Subcomponent

    56.4

    51.6

    Good

    Markit Services PMI Employment Subcomponent

    Solid expansion.

    Further solid rise.

    Good

    ISM Manufacturing PMI Employment Subcomponent

    51.4

    54.1

    Bad

    Markit Manufacturing PMI Employment Subcomponent

    Slowest rise in 7 months.

    Picked up slightly.

    Bad

    Initial Jobless Claims 4-Week Moving Average

    304.75k

    292.75k

    Bad

    Challenger Job Cuts

    50,579

    53,041

    Good

    Continuing Jobless Claims

    2.421M

    2.4M

    Bad

    ISM New York Employment Subcomponent

    49.3

    55.4

    Bad

    Chicago PMI Employment Subcomponent

    Suffered double digit losses.

    Driven to a 14-month high.

    Bad

    Overall

     

     

    Bad

     Even though a majority (7 out of 10) of the leading reports before NFP are showing a negative outcome, the string of good results over the last three months is so strong that it could help maintain more than decline.  Taking all these results together, I came up with my NFP estimation of 310k new jobs created in February 2015.  This is much better than the consensus estimate of 240k, and could send the USD flying higher against its rivals, particularly the USD/JPY which has recently made another run above 120.

    Last month’s NFP release was nearly a perfect release as Average Hourly Earnings were strong, NFP beat consensus, and the two previous months were revised higher.  The only drag on the day was the Unemployment Rate that ticked 0.1% higher, but was forgiven due to the 0.2% increase in the Participation Rate.  If my forecast is anywhere near what the actual result ends up being, we may see a similar reaction in markets, which means the USD could be the star of the day.

    Month

    Consensus

    Matt’s Forecast

    Neal’s Forecast

    Actual Result

    Matt’s Discrepancy

    Neal’s Discrepancy

    Jun-13

    167

    101

    167

    175

    74

    8

    Jul-13

    163

    126

    221

    195

    69

    26

    Aug-13

    184

    170

    253

    162

    8

    91

    Sep-13

    178

    172

    162

    169

    3

    7

    Oct-13

    182

    180

    191

    148

    32

    43

    Nov-13

    121

    116

    135

    204

    88

    69

    Dec-13

    182

    185

    222

    203

    18

    19

    Jan-14

    196

    184

    277

    74

    110

    203

    Feb-14

    185

    160

    126

    113

    47

    13

    Mar-14

    150

    131

    151

    175

    44

    24

    Apr-14

    199

    164

    150

    192

    28

    42

    May-14

    216

    205

    217

    288

    83

    71

    Jun-14

    214

    184

    248

    217

    33

    31

    Jul-14

    214

    217

    268

    288

    71

    20

    Aug-14

    231

    206

    262

    209

    3

    53

    Sep-14

    226

    220

    277

    142

    78

    135

    Oct-14

    215

    221

    247

    248

    27

    1

    Nov-14

    235

    232

    278

    214

    18

    64

    Dec-14

    231

    213

    186

    321

    108

    135

    Jan-15

    241

    237

    322

    252

    15

    70

    Feb-15

    236

    186

    251

    257

    71

    6

    Averages

     

     

     

     

    49

    54

    *all numbers in thousands of net new jobs

    For more intraday analysis and market updates, follow us on twitter (@MWellerFX, @FXExaminer, and @FOREXcom)


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