Non-Farm Payrolls Friday: Setting the Tone

Ladies and gentlemen, are you all ready for the much-awaited economic event for this week? I’m talking about Friday’s NFP report! If I remember correctly, November’s report printed only 11K in net job losses, which was 100K less than the consensus. Moreover, it was accompanied by an upward revision of October’s NFP reading and a 0.2% drop in unemployment. Good times! Could we be in for another major upside surprise?

Just recently, the ADP non-farm employment report showed that US employment fell by only 84K in December. Although the actual figure missed the consensus of 74K in net job losses, it was a huge improvement over the previous month’s 169K reading. As I rummaged through the dusty old archives, I found out that the December ADP reading was the smallest decline in employment since March 2008!

The latest ADP non-farm employment change provided us with a sneak preview of the government’s official nonfarm payrolls report this Friday. So, did US firms continue to cut payrolls in December? Yep, most probably… but the good news is that net job losses have likely eased to its slowest pace since the NFP report last printed a positive gain exactly a year ago.

The forecast is that only 3,000 net jobs were shed in December on top of November’s 11,000 shortfall. What? Did I miss typing any zeroes there? Heck no! We’re so used to seeing six-digit net job losses that a 3,000 figure seems so hard to fathom… Take a look at the past figures – the US experienced six-digit net job losses 14 out of the last 15 months!

Perhaps the jump in business activity during the Christmas holidays did the trick. Thank you Uncle Santa! Anyway, if you look at the underlying trend in the numbers, you’d notice that the NFP is slowly inching its way to positive territory. Still, remember that the US has lost about 7.2 million jobs since the start of the global financial crisis. I don’t know about you, but filling in those numbers is easier said than done.

You can just imagine how closely market participants will be looking at this week’s release. The prospect of job creation could stir quite a frenzy in the foreign exchange markets. After all, the recent FOMC meeting minutes wasn’t very cheerful. After saying that there was a possibility that interest rates could be raised sooner than expected in the previous months statement, the Fed triggered some alarms when news broke out that some members actually suggested further stimulus! Some took this as a step back towards the “cautious optimism” stance that the Fed had been holding for the latter part of 2009.

So what happens when your central bank doesn’t exactly exude confidence? Well, I highly doubt that traders will feel as confident as they were when they were buying up those dollars last month. This is what makes this week’s report so crucial – it could either make or break the recent dollar rally.

In my humble opinion, the dollar could experience a world of hurt if the upcoming NFP report comes in worse-than-expected. With the Fed’s indecisive tone on its meeting minutes and the off-target economic data seen earlier this week, ugly results on the NFP could serve as the final lock to seal the victory of the dollar bears this month.

On the other hand, assuming 2010 is the year where fundamentals come back in play, better-than-expected results NFP report could serve as the catalyst for another dollar rally, similar to the one seen towards the end of 2009!

With that said, let me just say: Watch out my forex friends as the results of the non-farm payrolls on Friday could very well set the way currencies trade this January!