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    NONFARM PREVIEW: Eyes on the 200k benchmark

    The title may be a little misleading as this post is more of a rant about why the Nonfarm data, in the grand scheme of things, means practically nothing to the US economy right now. And here is why...




    It's that time of month again where we will see no shortage of media coverage for Nonfarm payroll data. The headline figure has typically seen over 200k per month for the past two years with a few bumps along the way but, on the face of it, employment looks good in the US. It is just a shame the method for calculating the employment data is highly flawed and does not reflect a true representation of the employment situation. However my opinion is irrelevant because as traders, all we really need to know what the expectations are and how far away are we from it.

    As mentioned in previous posts we would like to see a deviation of over 60k to expect a more meaningful (and sustained) move across USD crosses but in recent months there has been more focus on average earnings (an indicator for inflation) and the abysmal participation rate. 



    Participation rate is the lowest since the 70s
    Unemployment is at multi-year lows of 5.1% and this is expected to move lower, helped by the participation rate (fewer participants’ means you are removed from the unemployment calculation, hence a lower rate). Whilst the trajectory of the rate has begun to slow down we are far away from seeing it rise again and, looking at the longer-term charts, nowhere near the lowest on record. 




    Unemployment remains at multi-year lows, thanks to (lack of) participation
    In case you hadn't heard, unemployment is dropping in the US and expected to move lower. However out curiosity I have looked at the unemployment rate from the 1940's and observed a longer-term cyclical pattern. To me, the cycles look relatively clean and similar to a % rate of change for inflation and of we overlay the S&P500 it moves inversely to unemployment. Personally I believe stocks have entered a bear market, so stocks may be leading the way for unemployment to rise over the next year or so for the US. So whilst this is not tradable information it is of interest for a longer-term outlook for the US (and global) economy. 




    Labor Market Conditions Index paints a grim picture
    The chart above was created by the FED to show a truer picture of the employment conditions in the US. However I am quite surprised that it receives so little media coverage and provides no noticeable market reactions, especially when you see it is barely above zero. Perhaps this would be a better signal that FED have not achieved their employment targets and for them to not raise rates this year? 


    What to expect tomorrow
    As the prior month only printed 173k we can expect negative sentiment for the Greenback if we see a second subsequent print below 200k. Two consecutive months below 200k have not occurred since Jan 2014 (which itself was the first occasion since May 2012. As we are expected to land around 200k then don't expect too many fireworks if we hit target but if we come in over 260k then traders are likely to bet on a December 2015 rate hike becoming more likely. I am still sat on the fence as to whether the FED will raise because, despite data not backing up the raise, FED members continue to make hawkish comments. I am however quite certain that if they do raise the Greenback will sell-off (like it has the tree previous occasions FED raised rates). 


    Markets worth considering for tomorrow's employment:
    USDJPY
    USDCAD
    WTI
    GOLD


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