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    NFP Prep: Data Points to Potential Blockbuster Jobs Report

    The June Non-Farm Payroll report will be released tomorrow at 8:30 ET (12:30 GMT, 1:30pm BST), with expectations centered on a headline print of 231k after last month’s stellar 280k reading. My model suggests that the report could exceed these expectations, with leading indicators suggesting a June headline NFP reading of 263K.

    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

    As the chart above shows, this month’s projected 263k reading is actually the highest expected monthly NFP figure at any point in the last 14 years, according to the model. While the historically correlated ISM Services PMI employment survey will not be released until next week, all the other labor market indicators improved last month. The ISM Manufacturing PMI employment component recovered back to 55.5 while the ADP Employment report rose to 237k; both of these readings are year-to-date highs. Meanwhile, initial jobless claims continued to march lower, hitting an historically extreme low level of just 268k during the survey week.

    Trading Implications

    Despite the ongoing drama in Greece, many traders are eyeing September as a likely time for the Federal Reserve to start hiking interest rates. Therefore, the jobs report will be interpreted through the lens of monetary policy. 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-250k

    Slightly Bullish

    Neutral

    > 250k

    Bullish

    Slightly Bearish

    As always, traders should monitor both the overall quantity of jobs created as well as the quality of those jobs. To that end, the change in average hourly earnings could be just as critical as the headline jobs figure, especially after last month’s strong 0.3% m/m reading. As long as average hourly earnings can meet the 0.2% m/m expectation, it would strengthen the case for a September rate hike by the Federal Reserve. 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, experienced traders know that the U.S. labor market is notoriously difficult to predict 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.

    Note that I will be hosting a Live Trading NFP webinar starting at 8:00ET (12:00 GMT) to cover the release live and analyze its impact in real time. Register for free here.

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


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