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Hello, forex friends! We’ve got another NFP Friday coming up (February 3, 1:30 pm GMT), so if you’re planning to trade this top-tier event and you need to know what happened during the previous NFP report, as well as what’s expected for the upcoming one, then this Forex Preview is just for you.


Updated on: Feb 1, 2017, 3:44 pm GMT

Updated to include ISM’s manufacturing PMI report, the ADP report, and Markit’s revised manufacturing PMI report. Conclusion changed.


What happened last time?

  • December non-farm payrolls: 156K vs. 175K expected
  • November non-farm payrolls: upgraded from 178K to 204K
  • October non-farm payrolls: further downgraded from 142K to 135K (161K originally)
  • Average hourly earnings m/m: 0.4% vs. 0.3% expected, -0.1% previous
  • Jobless rate: ticked higher from 4.6% to 4.7% as expected
  • Labor force participation rate: ticked higher from 62.6% to 62.7%

I noted in my Forex Preview for the December 2016 NFP report that “the available leading indicators seem to be leaning heavily towards a larger increase in non-farm employment in December, which is contrary to expectations that non-farm employment in December will be slightly lower compared to November.”

However, both consensus and the leading indicators were way off. First of all, non-farm payrolls only saw a net increase of 156K in December, which is a way below the expected 175K. Secondly, December’s reading is much lower compared to November’s upwardly revised 204K reading (178K previous).

The December NFP report wasn’t all that bad, though. For one, non-farm payrolls was still above the 100K floor. Another is that wage growth managed to exceed expectations, since it increased by 0.4% (+0.3% expected) after the disappointing 0.1% contraction in November.

And while the jobless rate deteriorated from 4.6% to 4.7%, the labor force participation rate also ticked higher from 62.6% to 62.7%. This means that Americans were more encouraged to join or rejoin the labor force. Moreover, the 4.7% jobless rate was widely-expected, and also happens to be in-line with the Fed’s own projections.

Overall, the December report presented a mixed picture. However, the reading for non-farm employment was a swing and a miss, so forex traders initially dumped the Greenback as a knee-jerk reaction.

USD Index: 15-Minute Forex Chart
USD Index: 15-Minute Forex Chart

But I mentioned in my Forex Preview, “follow-through selling is generally unlikely” if the reading for non-farm employment is above the 100K floor. Instead, forex traders will likely turn their attention to other labor indicators, with wage growth in focus. And since non-farm employment was still above 100K and wage growth accelerated, rate hike expectations for 2017 actually improved. As such, the Greenback rapidly recovered from the initial drop and proceeded to climb higher.

June FOMC Expectations (As of June 6. 2017)
June FOMC Expectations (As of June 6. 2017)

What can we expect this time?

  • Non-farm payrolls: 175K expected vs. 156K previous
  • Jobless rate: steady at 4.7% expected
  • Average hourly earnings m/m: 0.3% expected vs. 0.4% previous

The general consensus among economists is that the U.S. economy generated 175K non-farm jobs in January. Most economists therefore think that job creation accelerated in January. Other than that, the jobless rate is expected to hold steady at 4.7%. Average hourly earnings, meanwhile, are expected to increase by 0.3%, which is a tick slower than December’s 0.4% rate of increase.

Unfortunately, ISM’s all-important non-manufacturing PMI report is scheduled for release after the NFP report, so we’re a bit handicapped here.

Anyhow, looking at the available labor indicators, Markit’s final manufacturing PMI reading jumped from 54.3 to 55.0 in January. In addition, January’s reading is the best reading since March 2015. With regard to employment, commentary from Markit noted that payrolls increased, but “the rate of job creation eased slightly from the 18-month high seen in December.”

Moving on, Markit’s flash services PMI reading jumped from 53.9 to 55.1, putting an end to two consecutive months of deteriorating readings. Moreover, the reading for January is the highest since November 2015. With regard to employment in the service sector, Markit noted that survey results “indicated a solid upturn in payroll numbers, although the rate of growth moderated from December’s 15-month peak.”

Next, ISM’s manufacturing PMI reading for January soared from 54.7 to 56.0, which is the highest reading since November 2014. And the employment index is looking pretty good, since it also soared from 52.8 to 56.1, which means that payroll numbers increased at a faster pace.

Finally, the ADP report for January printed a 246K increase in non-farm employment, which is way better than the expected +165K. In addition, the reading is much better than December’s downwardly revised +153K figure (+156K previous).  The large increase in January was due to higher job generation in both the service sector and the goods-producing sector.

Looking at historical trends, the U.S. economy usually suffers massive job losses in January, as companies shed part-time jobs related to the holiday season. However, seasonal adjustments mean that the seasonally-adjusted reading is always higher and also usually a positive number.

January NFP: Seasonal Adjustments

Economists tend to overshoot their estimates, though, so we tend to get more downside surprises.

January NFP: Expected vs. Actual

Furthermore, seasonal adjustments mean that the reading for December also usually gets an upgrade.

December NFP: Revisions

Overall, the available leading indicators are mixed since Markit is saying that payroll numbers increased, but at a slower pace compared to December. The ADP report, meanwhile, is pointing to a rapid acceleration in job creation while ISM is saying the same, at least in the manufacturing sector. The consensus reading of a moderately faster rate of job creation therefore looks about right. However, probability appears skewed towards a downside surprise, since historical trends show that economists tend to overshoot their estimates. As I mentioned earlier, however, we’re kinda handicapped on this one since ISM’s non-manufacturing PMI report will be released after the NFP report.

In any case, just remember that a better-than-expected reading for non-farm employment usually triggers a quick Greenback rally. Conversely, a miss usually triggers a quick Greenback sell-off. And the quick Greenback dump because of the previous NFP report is a good example of the latter.

Also as usual, keep in mind that follow-through selling is unlikely if non-farm payrolls is still above the 100K floor, which is the number of jobs per month that’s needed to keep up with working age population growth, as well as keep rate hike expectations alive. If non-farm employment is a miss but still above the 100K floor, then forex traders would likely turn to other labor indicators for direction after the initial reaction, with wage growth usually in focus. However, the Greenback’s price action is also dominated by Trump-related reports and events lately, so keep an eye and an ear out for that as well. This week, for example, the Greenback has been weakened by comments from Trump and his trade adviser that heavily implied that a strong Greenback is undesirable.

 

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