ThinkMarkets - Analytics


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    Nonfarm Payroll in focus

    Not only do we have the highly anticipated NFP data set from the US today but also host of Markit PMI data is also released for both Europe and US. 

    View related analysis:
    A statistical 'peak' at unemployment

    View related analysis:
    Nonfarm payroll in focus

    As for the NFP read the consensus is around 161k jobs created. As traders we hope for a large deviation from consensus view to instil volatility, oo if NFP fails to deliver the volatility traders tend to lust for then perhaps a surprise print from the PMI data could step in. With ISM manufacturing data looking brighter we have a positive expectation for the services read today. 

    Focussing on NFP we have taken data from 2010. The overall trend (represented by the gray, faded 'linear' line) countinues to point higher to suggest pending strength in the months ahead. However such lines should be taken into contect with other forms of analysis, such as the FED's own labor market conditions indicator (more on this below below).

    With both the 3-month and 12-month average pointing lower since the 300k print 6 months ago we ponder if it is due a cycle low and for job creation to increase. However, if the consensus is anything to go by we may be in for a quiet read. 

    ADP employment change is a privately run employment survey which leads NFP by 3 days. Below we have compared NFP monthly change to ADP monthly change to study the relationship to see if there is any predictability between the two. One observation is the tendency for NFP to move in the same direction as ADP from month to month, but magnitude is less connected. Take for example the previous ADP number which saw a drop from 195k to 157k, we also saw NFP move in the same direction (lower) but also take a similar reduction. Whilst the magnitude is not always similar it can be a good sentiment indicator evading into NFP which, if correct this time around, points towards a relatively subdued monthly change and to land around the 160k-170k mark. 

    This is not necessarily a bad thing because hitting consensus will not likely sway bullish bets on a June or July rate rise, whereas a shock downside miss could quickly price in further in a later rate hike. 

    As for the longer-term picture for NFP data we have compared the LCMI (labour market conditions index) to the monthly payroll change. The correlation can be clearly seen over the longer-term basis but there is no clear relationship on a monthly basis. However, the main concern we have here is how labour market conditions seemingly topped in 2010. If this pattern does persist and creeps its way into NFP data then all of a sudden 20k jobs per month, a level we have become quite accustomed too, could become a distant memory. 


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