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Research Note: April NFP Prep

Highlights


By: Matt Weller, CMT, Senior Technical Analyst

The April Non-Farm Payroll report will be released tomorrow at 8:30 ET (12:30 GMT, 1:30 BST), with expectations centered on a headline print of 227k after last month’s disappointing 126k reading. My model suggests that the report could come in below these expectations once again, with leading indicators suggesting a April headline NFP reading of just 177K.

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

Once again, this may seem like a particularly downbeat forecast, but the major labor market indicators have quietly deteriorated sharply since last year’s Q4 peak. The ADP Non-Farm Employment measure fell to 169k, its lowest reading since last February, while initial jobless claims in the survey week actually ticked up to 296k, though the volatile measure later dipped back down to a 15-year low of just 263k. Concerningly, hiring in the manufacturing sector seems have ground to a halt, with the ISM Manufacturing PMI employment component signaling an outright contraction in employment at 48.3. The ISM Services PMI employment was the lone bright spot, staying essentially unchanged at 56.7 last month.

 Trading Implications

Especially in the wake of the April FOMC meeting, the jobs report will be interpreted through the lens of Federal Reserve policy. While the total number of jobs created is always important, the change in average hourly earnings will also be critical with Fed members watching for signs of inflation like a hawk (no pun intended!). Just like last month, traders may experience “sticker shock” if we see NFP print below the key 200k level for the second consecutive month. 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

< 175k

Bearish

Slightly Bullish

175k-250k

Slightly Bullish

Neutral

> 250k

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 aforementioned average hourly earnings measure of wages, which rose at a healthy 0.3% m/m in March. 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 increase of 205k jobs in April 2015, which would be an improvement from last month’s dismal report, but still not enough to beat consensus. If this were to be the outcome, it would potentially put to rest some worries that the US economy is crashing and burning all around us. In addition, there is the possibility that last month’s disappointment could turn more positive with a favorable revision, and could potentially keep the 14 straight months of 200k results alive.

This month’s leading indicators are really a mixed bag of results as there were six indications of strength, three signs of weakness, and one result that ended up being a wash. The mix as to where they rank on the scale was interesting as well as two of the weak results were near the top of my table, weighing heavily on the final result. Still, the sheer number of strong results turned the tide to make this month’s forecast better than the average of the last three months.

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 126k as my base (last month’s result), it will now be 197k (an average of 201k January, 264k February, and 126k March).

Here is the breakdown of the leading employment reports:

Leading Event

Current Release

Previous Release

Good or Bad for NFP?

ADP Employment Change

169k

175k

Bad

ISM Non-Manufacturing PMI Employment Subcomponent

56.7

56.6

Neutral

Markit Services PMI Employment Subcomponent

Strongest since June 2014.

Expanded.

Good

ISM Manufacturing PMI Employment Subcomponent

48.3

50.0

Bad

Markit Manufacturing PMI Employment Subcomponent

Rose further.

Steepest upturn in 4 months.

Good

Initial Jobless Claims 4-Week Moving Average

279.5k

285.5k

Good

Challenger Job Cuts

61,582

36,594

Bad

Continuing Jobless Claims

2.228M

2.325M

Good

ISM New York Employment Subcomponent

60.0

53.7

Good

Chicago PMI Employment Subcomponent

Increased to highest since January.

Rose from the previous month.

Good

Overall

 

 

Good

 You may have noticed that the ISM Non-Manufacturing PMI was better this month than it was last month, but only by 0.1, which isn’t enough to provide a clear indication. If we were to utilize that as a positive result though, my forecast would have been closer to consensus expectations of 227k with a 223k guesstimate. Regardless, either forecast would likely be a catalyst for a sigh of relief as the US employment situation got back to business as usual. Using the data as it is, I came up with my NFP estimation of 205k new jobs created in April 2015. This is much better than the previous result, but worse than the consensus estimate of 227k. If this were to be the result, the reaction may be more muted than anything else as investors realize that last month may have just been an anomaly and the Federal Reserve could move forward with their plan to increase interest rates before the calendar turns to 2016.

One thing to be wary of, though, is the potential for revisions to last month’s result. If revisions improve the numbers up to the 200k level, the reaction in the USD could be very positive. The USD/JPY is the most likely benefactor of this type of outcome and may help bolster the pair to overtake and stay above the 120 level in the near term.

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

Apr-15

247

198

296

126

72

170

Averages

 

 

 

 

51

57

*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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