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    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)


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