Research Note: March NFP Prep

Highlights

By: Matt Weller, CMT, Senior Technical Analyst

The March Non-Farm Payroll report will be released tomorrow at 8:30 ET (12:30 GMT, 1:30 BST), with expectations centered on a headline reading of 247k. My model suggests that the report could print at below these expectations, with leading indicators suggesting a March headline NFP reading of just 198K.

The model has been historically reliable, showing a correlation coefficient of 0.90 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

While this may seem like a particularly downbeat forecast, major labor market indicators all deteriorated in the last month. The ADP Non-Farm Employment measure fell to 189k, its lowest reading in nearly a year, while initial jobless claims in the survey week ticked up to a still-historically-low 291k from 283k last month. Most importantly, the employment component of the Manufacturing PMI survey fell to 50, showing no growth in hiring. Unfortunately, the Service PMI report will not be released until next week, but based on the leading indicators we have in hand, the risk is for a downside surprise in this month’s NFP report.

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 job growth as of late. That said, traders may still have some “sticker shock” if we see NFP print below 200k for the first time since September. 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	Slightly 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 disappointed some traders at just 0.1% m/m in February. If wages show signs of accelerating, the market may treat the report as bullish for the US dollar regardless of the headline figure. Readers should also note that many traders will be out of the office for Good Friday, meaning that there will be less liquidity than usual. Therefore, if the report comes out near the consensus estimate, the market could quickly grind to a halt as traders look ahead to the Easter holiday; on the other hand, if we see a surprising reading, the market could still move more dramatically than usual.

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 robust increase of 296k jobs in March 2015, which would nearly be an exact copy of last month’s surprisingly strong 295k result. If this were to be the outcome, it would continue the hot streak that US data has been enjoying on the employment front as NFP has been north of 200k (including revisions) for THIRTEEN STRAIGHT MONTHS, a feat that was last seen from 1993 to 1995 when there were 19 straight months of 200k results.

When the leading figures first started pouring in this week, it wasn’t looking too positive for NFP as both ADP Employment Change and the ISM Manufacturing PMI Employment Subcomponent fell below their previous releases. Since they weigh so heavily in my forecasting model, you could say my prediction really started off behind the eight ball, but subsequent releases turned the tables in the other direction as every one of them showed strength in the labor market.

Another factor that is a little different about this month is that both Services PMI’s won’t be released until next week. Being that the service industry is the largest employing sector of the US economy; their exclusion could have a profound impact on my prediction. For instance, if they were both showing decline, my forecast would have been 266k, if they were both showing strength, my forecast would have been 314k.

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 295k as my base (last month’s result), it will now be 288k (an average of 329k December, 239k January, and 295k February).

Here is the breakdown of the leading employment reports:

Leading Event	Current Release	Previous Release	Good or Bad for NFP?
ADP Employment Change	189k	214k	Bad
ISM Non-Manufacturing PMI Employment Subcomponent	N/A	56.4	Neutral
Markit Services PMI Employment Subcomponent	N/A	Solid expansion.	Neutral
ISM Manufacturing PMI Employment Subcomponent	50.0	51.4	Bad
Markit Manufacturing PMI Employment Subcomponent	Steepest upturn in 4 months.	Slowest rise in 7 months.	Good
Initial Jobless Claims 4-Week Moving Average	285.5k	304.75k	Good
Challenger Job Cuts	36,594	50,579	Good
Continuing Jobless Claims	2.325M	2.421M	Good
ISM New York Employment Subcomponent	53.7	49.3	Good
Chicago PMI Employment Subcomponent	Rose from the previous month.	Suffered double digit losses.	Good
Overall			Good

You may have noticed that even if the Services PMI reports were negative, my forecast would have been above consensus expectations of 247k, and thus, likely good for the US economy in the grand scheme of things. Taking all the available data together though, I came up with my NFP estimation of 296k new jobs created in March 2015. This is much better than the consensus estimate of 247k, 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 left many pundits shaking their heads in disbelief at the strength of the US labor market despite other metrics showing growing weakness, but that may simply be a flaw in expectations. Considering the recent string of 200k results, perhaps low 200k outcomes shouldn’t be categorized as “good” anymore, and the goalposts need to be moved back. In the current environment, though, anything near or above consensus may encourage the Federal Reserve to raise rates sooner rather than later which would be a boon to the USD in thinly traded Good Friday markets.

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
Mar-15	241	220	310	295	75	15
Averages					50	52

*all numbers in thousands of net new jobs

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

Forex.com

Research Note: March NFP Prep

Highlights

Other analytics