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Greetings, forex friends! A new month is on the horizon, which means another U.S. non-farm payrolls report (NFP) will soon be released.

And since another NFP report is coming our way this Friday (Feb. 2, 1:30 pm GMT), it’s time to read up on another edition of my Event Preview so that y’all can get up to speed on what happened last time and what’s expected this time around.

What happened last time?

  • Dec. non-farm payrolls: +148K vs. +190K expected
  • Nov. non-farm payrolls: upgraded from +228K previous to +252K
  • Oct. non-farm payrolls: downgraded from +244K to +211K
  • Dec. average hourly earnings m/m: +0.3% as expected
  • Nov. average hourly earnings m/m: downgraded from +0.2% to +0.1%
  • Jobless rate: steady at 4.1% as expected
  • Labor force participation rate: steady at 62.7%

If y’all can still recall, I noted in my Event Preview for the December NFP report that leading indicators were mixed but leaning more towards a slowdown in jobs growth.

Moreover, I concluded that economist have a slight tendency to overshoot their guesstimates for non-farm payrolls, so probability appeared to be skewed more towards a downside surprise.

As it turns out, December jobs growth did “surprise” to the downside since non-farm payrolls only increased by 148K, which is below the +190K consensus, which is why the Greenback initially reacted by weakening across the board.

Overlay of USD Pairs: 15-Minute Forex Chart
Overlay of USD Pairs: 15-Minute Forex Chart

However, jobs growth was above the 100K floor. And as I noted in my previous event preview, follow-through selling is usually limited, even if non-farm jobs growth is below expectations, as long as non-farm payrolls is still above 100K, which is the number of jobs that the Fed thinks is needed to keep up with working age population growth.

Moreover, average hourly earnings grew by 0.3% month-on-month, which is within expectations. Given all that, follow-through selling was limited on most dollar pairs. USD/CAD (pink line on overlay) was an exception, though, but that was due to Canada’s better-than-expected jobs report, rather than the U.S. NFP report.

What can we expect this time?

  • Non-farm payrolls: +180K vs. +148K previous
  • Jobless rate: steady at 4.1% expected
  • Average hourly earnings m/m: 0.2% expected vs. 0.3% previous

Most economists forecast that the U.S. economy generated 180K non-farm jobs in January, which means that economists think that jobs growth picked up the pace compared to December’s +148K.

As for the other labor indicators, average hourly earnings is expected to slow from 0.3% to 0.2%.

The jobless rate, meanwhile, is expected to hold steady at 4.1% yet again.

And unfortunately, we only have Markit’s flash manufacturing and services PMI report as the available leading indicators.

And according to Markit, “Payroll numbers [in the manufacturing sector] continued to increase at the start of 2018.”

The same can be said for the service sector. Although “the rate of job creation eased slightly since December and was the least marked for seven months.”

And since the service sector is responsible for the bulk of jobs in the U.S., it’s likely that weaker jobs growth in the service sector would translate to weaker overall jobs growth.

Okay, let’s move on to historical tendencies. And as you can see below, economists apparently tend to be too optimistic and overshoot their guesstimates since there are far more downside surprises than upside surprises.

There aren’t really any clear historical tendencies for wage growth, however.

There are also no clear historical patterns with regard to the jobless rate.

To summarize, we only have limited leading indicators, but they seem to point towards a slowdown, which is contrary to the consensus the jobs growth picked up the pace in January.

And even if jobs growth did pick up the pace, economists have a tendency to be too optimistic with their guesstimates, resulting in more downside surprises. Probability therefore seems to be skewed towards a downside surprise, at least for jobs growth, since there are no clear historical patterns for the other labor indicators.

But as always, just keep in mind that we’re playing with probabilities here, so there’s always a chance that non-farm payrolls will surprise to the upside instead.

And as with all NFP reports, the Greenback usually has a knee-jerk reaction, depending on whether non-farm payrolls beat or meet expectations, with a quick rally for the former and a quick selloff for the latter being the usual reactions.

However, just remember that follow-through selling is usually limited if the actual reading for non-farm payrolls is above +100K since a reading above +100K means that the Fed is still on track for a rate hike.

Although that also depends on the other labor indicators, with wage growth usually in focus, since a weaker-than-expected reading for average hourly earnings can weaken expectations for further rate hikes.

And as always, just remember that if news trading ain’t your thing or if high volatility makes you uncomfortable, then you always have the option to sit on the sidelines and wait for things to settle down.