Greetings, forex friends! The first non-farm payrolls report (NFP) of the year will be released this Friday (Jan. 5, 1:30 pm GMT). And if you’re planning to trade this top-tier event and you need to get up to speed on what happened last time and what’s expected this time, then you better gear up by reading up on today’s event preview.
What happened last time?
- Nov. non-farm payrolls: +228K vs. +210K expected
- Oct. non-farm payrolls: downgraded from +261K previous to +244K
- Sept. non-farm payrolls: upgraded from +18K to +38K
- Nov. average hourly earnings m/m: 0.2% vs. 0.3% expected
- Oct. average hourly earnings m/m: downgraded from 0.0% to -0.1%
- Jobless rate: steady at 4.1% as expected
- Labor force participation rate: steady at 62.7%
In my Event Preview for the November NFP report, I noted that leading indicators were mixed. Even so, I concluded that probability for both non-farm payrolls and the jobless rate appeared to be skewed more towards an upside surprise, based on the historical data.
Well, the jobless rate held steady at 4.1% as expected, but non-farm payrolls did surprise to the upside since the U.S. economy generated 228K non-farm jobs in November, beating the consensus for a 210K increase.
And while jobs growth in October was downgraded from +261K to +244K, jobs growth in November was revised higher from +18K to +38K, which means that the U.S. economy created 3K more jobs than originally estimated.
Unfortunately, wage growth was a bitter pill to swallow since average hourly earnings only grew by 0.2% month-on-month in November. Worse, October’s flat reading was revised to show a disappointing 0.1% contraction, which resulted in the year-on-year reading getting revised lower from +2.4% to +2.3%.
But on a more upbeat note, annual wage growth did rebound in November, accelerating from October +2.3% to +2.5%.
In summary, November’s jobs growth impressed, which is why the Greenback initially tried to jump higher. However, wage growth missed expectations, which is why dollar bears quickly charged in and defeated the dollar bulls.
But as noted in my previous event preview, follow-through selling pressure tends to be limited as long as the reading for non-farm payrolls is still above 100K. And that was also the case here. In fact, the Greenback even eventually recovered on most pairs.
What’s expected this time?
- Non-farm payrolls: +190K vs. +228K previous
- Jobless rate: steady at 4.1% expected
- Average hourly earnings m/m: 0.3% expected vs. 0.2% previous
The consensus among most economists is that around 190K non-farm jobs were generated in December, which means that economists think that jobs growth slowed.
However, wage growth is expected to accelerate since average hourly earnings are forecasted to have increased by 0.3% after printing a 0.2% increase back in November.
As for the jobless rate, that’s expected to hold steady at 4.1%.
Okay, let’s now take a look at the available leading indicators.
- Markit’s manufacturing PMI report found that “firms added to their payrolls and at the fastest rate since September 2014.”
- However, Markit’s services PMI report, noted that “Job creation eased to a seven-month low in December, which survey respondents linked to softer new business growth and a moderation in confidence regarding the year ahead outlook.”
- Meanwhile, the ISM manufacturing PMI report’s employment index deteriorated from 59.7 to 57.0, which means that employment grew at a softer pace. This contradicts Markit’s findings.
Looks like the available leading indicators, they seem to be painting a mixed picture again since Markit found that jobs growth ramped up in the manufacturing sector while ISM’s found that jobs growth remained solid but slowed down compared to the previous month.
Overall, however, the available leading indicators seem to point more towards slower jobs growth in December since Markit’s finding showed that jobs growth in the labor-intensive service sector weakened.
Although it should be noted that the important ISM non-manufacturing PMI report won’t be released until after the NFP report, so we’re actually bit handicapped this time around.
Anyhow, let’s now take a look at historical tendencies. And, well, the consensus that jobs growth slowed in December does seem to have a historical basis since jobs growth in December is weaker compared to November more often than not.
And it looks like economists have a slight tendency to be too optimistic with their guesstimates since there are more downside surprises for the actual December reading.
But on a happier note, November’s reading for jobs growth usually gets an upgrade.
Moving on to the jobless rate, economists tend to be a bit pessimistic with their guesstimates, resulting in more upside surprises. Although economists did get it right in the past two years.
As for wage growth, there aren’t really any clear historical tendencies.
To summarize, the available leading indicators are mixed but lean more towards a slowdown, which is in-line with the consensus that jobs growth slowed in December.
Moreover, historical data show that economist have a slight tendency to overshoot their guesstimates for non-farm payrolls, so probability seems skewed more towards a downside surprise.
As always, however, it must be stressed that we’re playing with probabilities here, so there’s no guarantee that the actual reading for NFP will be worse-than-expected.
Also, just keep in mind that the Greenback usually has a knee-jerk reaction to non-farm payrolls. However, wage growth is usually the determining factor when it comes to follow-through buying or selling.
Even so, follow-through selling is usually (but not always) only limited if jobs growth is still above 100K, which is the minimum number of jobs needed per month to keep up with working-age population growth, as well as sustain rate hike expectations.
Anyhow, just remember that if news trading ain’t your thing or if high volatility makes you jittery, then you always have the choice of sitting it out on the sidelines.