Forex Trading Guide: U.S. NFP Report (Dec)

Hello, forex buddies! NFP Friday is fast approaching! If you’re planning to trade this event and want to get up to speed, then gear up by reading up on another edition of my Forex Trading Guide.

What is this report all about?

For the forex newbies out there who are wondering what’s all the hype with this NFP Friday event, let me give y’all a brief rundown.

NFP Friday refers to the monthly release of the NFP report by the U.S. Bureau of Labor Statistics. It’s a comprehensive report on the current state of the U.S. labor market, and forex traders usually focus on the jobless rate, the average hourly earnings (wage growth), and the net increase or decrease in non-farm payrolls.

An improvement in any or all of these major employment indicators is good for the U.S. economy (and the Greenback) since a robust labor market generally means higher levels of consumer spending, which drives demand for goods and services higher, powering the U.S. economy and pushing inflation higher. Higher inflation levels and faster economic growth, in turn, help convince the U.S. Fed to hike rates.

Speaking of a rate hike, the U.S. Fed is now in a tightening cycle, with perhaps two potential rate hikes in tow for this year. And a positive NFP report will help in convincing Fed officials to vote in favor of a rate hike while a disappointing one may dissuade Fed officials from hiking rates, so forex traders, especially the interest rate junkies, have their eyes on this and the other upcoming NFP reports.

What happened last time?

  • Non-farm payrolls: 211K vs. 200K expected, 298K previous
  • Jobless rate: held steady at 5.0% as expected
  • Average hourly earnings: 0.2% as expected vs. 0.4% previous
  • Labor force participation rate: uptick to 62.5% vs. 62.4% previous

The NFP report for the November period was pretty strong overall because the jobless rate held steady at 5.0% while the labor force participation rate ticked higher to 62.5% from 62.4% previous. Wages also continued to grow, albeit at a slower rate when compared to the previous month.

And if y’all can still recall, I noted in my previous Forex Trading Guide for the NFP report that leading indicators at the time were hinting at a potential upside surprise for non-farm payrolls. Well, non-farm employment did see a net increase of 211K jobs, which is higher than the expected 200K increase, and the previous month’s reading was upgraded from +271K to +298K to boot. The 211K net increase is actually lower than the 12-month average of 237K. Still, the NFP report was strong overall and helped to seal the deal for a December rate hike.

What do forex analysts expect?

  • Non-farm payrolls: 200K expected vs. 211K previous
  • Jobless rate: expected to hold steady at 5.0%
  • Average hourly earnings: 0.2% expected, same as previous

For the upcoming NFP report, the consensus among forex traders and market analysts is that the jobless rate will hold steady at 5.0% while wages are expected to grow by 0.2%, the same rate as last time. Non-farm employment, meanwhile, is expected to increase by 200K, which is a solid increase but lower than the 211K net increase during the the November period.

A quick look at some leading indicators yields a mixed reading since commentary from Markit’s manufacturing PMI report for the U.S. states that “payroll numbers rose at a solid rate that was slightly faster than seen during the previous month” while the employment sub-index for the Institute for supply Management’s (ISM) manufacturing PMI printed a 48.1 reading in December, down from 51.3 back in November. Regarding the services sector, which actually provides the bulk of employment, Markit’s preliminary services PMI dropped from 56.1 to 53.7, but commentary from the report noted that job creation was “resilient” during the reporting period.

Overall, a slightly smaller increase seems about right. But be wary of a possible downside surprise since the bulk of the previous month’s net increase in employment was apparently from an increase in part-time jobs given that part-time employment increased from 27,183K to 27,320K whereas full-time employment only slightly increased from 122,024K to 122,027K. Given the nature of part-time employment, there’s a chance that some of them were shed during the December period. We’ll get more clues and I’ll be updating this write-up once ISM’s non-manufacturing PMI and ADP’s employment report are released during the U.S. forex session later, so make sure to check back once in a while.

Update:

ADP’s jobs report printed a significantly better-than-expected figure (257K vs. 198K expected, 211K previous) while ISM’s non-manufacturing PMI came in lower than expected (55.3 vs. 56.0 expected, 55.9 previous), but the employment sub-index was slightly higher at 55.7 when compared to the previous reading of 55.0, which skews the NFP report slightly towards an upside surprise. That also means that a downside surprise would likely cause a bigger reaction from forex traders.

How might the U.S. dollar react?

Forex traders usually have a knee-jerk reaction to the readings depending on whether or not they beat the market’s expectations. A better-than-expected increase in net employment, for example, usually convinces forex traders to load up on the Greenback while a lower-than-expected reading usually convinces forex traders to go on a Greenback selling spree.

The previous NFP report was an exception to this usual reaction, however, because the Greenback rally triggered by the higher-than-expected increase in non-farm employment was capped very quickly and the Greenback was only able to rise higher due to the follow-through buying after the initial reaction.

USD Index 15-minute Forex Chart

USD Index 15-minute Forex Chart

In fact, Pip Diddy noted in one his Top Forex Market Movers of the Week that the higher-yielding Kiwi and Aussie were the main beneficiaries of the positive NFP report, thanks to the sudden return of risk appetite. The most likely reason for the Greenback’s forex price action at the time was that forex traders who were expecting a December rate hike were probably getting out of their Greenback longs by selling into the rally, which is a possible scenario that I presented in my previous Forex Trading Guide.

 

 

  • Aaron W

    Check out the offset correlation between NFP and Services PMI over the past few years, it’s uncanny …. every time Services PMI changes direction, NFP follows suit 2 – 3 months later.

    Capacity Utilization and Retail Sales have also both been implying weakness in the labor market, so I wouldn’t be surprised if this NFP came in low ……

    • Thanks! I’m gonna have to check that out. Although the correlation is to be expected, I suppose. After all, only 12,318K people are employed by the manufacturing sector while private services account for about 101,318K people, so changing conditions in the services sector tend to have a bigger impact on NFP.

      Regarding capacity utilization and retail sales, you’re spot on since they have been implying weakness in the labor market. However, they usually lag behind the NFP report by a month. But they do hint at changing conditions, so I use them mainly as longer-term labor market indicators.

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