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Hello, forex friends! We’ve got another NFP report scheduled for release this Friday (April 7, 12:30 pm GMT).

And if you’re planning to trade this top-tier event and need to get up to speed on what happened last time and what’s expected this time, then today’s Forex Preview is just for you!

What happened last time?

  • February non-farm payrolls: 235K vs. 185K expected
  • January non-farm payrolls: upgraded from 227K to 238K (+11K)
  • December non-farm payrolls: downgraded from 157K to 155K (-2K)
  • February average hourly earnings m/m: 0.2% vs. 0.3% expected, 0.2% previous
  • February jobless rate: downtick from 4.8% to 4.7% as expected
  • February labor force participation rate: climbed from 62.9% to 63.0%

In my Forex Preview for the February NFP report, I pointed out that the leading indicators were mixed, but that economists had a historical tendency for undershooting their forecasts. As a result, there were way more upside surprises than downside surprises.

And there was an upside surprise all right, since non-farm employment increased by 235K in February, easily beating expectations for a 185K increase.

February NFP: Expected vs. Actual

Moreover, January’s reading was also upgraded from 238K, which is 11K more than originally estimated. Unfortunately, December’s reading was slightly downgraded by 2K to 155K. Still, that’s a net increase of 9K from all those revisions, which is great.

Looking at the other labor indicators, the jobless rate ticked lower from 4.8% to 4.7% during the February period. Better still, the downtick in the jobless rate was despite the labor force participation rate climbing higher from 62.9% to 63.0%, which is an 11-month high. This means that the U.S. economy was more than able to accommodate the influx of new and returning workers since the jobless rate improved as the number of jobless Americans fell from 7,635K to 7,528K.

So far, so good, right? Well, wage growth was, unfortunately, a miss, since average hourly earnings only printed a 0.2% increase (+0.3% expected).

Aside from the miss in wage growth, the February NFP report was actually pretty good, so much so that it helped push expectations for a March rate hike into near certainty. And we now know that the Fed also viewed the March NFP report in a positive light. After all, the Fed did hike in March.

But despite the overall strong NFP report and improved rate hike odds, the market reacted by dumping the Greenback. What sorcery is this, you ask?

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

Well, market analysts say that most market players were disappointed with the pace of wage growth while some market players were also expecting an even bigger upside surprise, given that the February ADP report printed a 298K increase in non-farm payrolls.

And as you can see below, the Greenback already had a good run prior to both ADP and NFP reports, thanks to higher rate hike expectations at the time because of the Fed’s hawkish media blitz.

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

And when the ADP report did come out, it caused the Greenback to jump even higher. As such, a sort of “buy the rumor, sell the news” scenario very likely played out. In addition, the March FOMC statement was set for the week after the NFP report, so forex traders who had already priced-in a Fed rate hike also likely used the NFP report to unwind some of their bets.

What can we expect this time?

  • Non-farm payrolls: 175K expected vs. 235K previous
  • Jobless rate: steady at 4.7% expected
  • Average hourly earnings m/m: 0.2% expected, same as previous

For this Friday’s March NFP report, the general consensus among economists is that 175K jobs were generated during the March period. This is obviously fewer than February’s 235K increase.

Meanwhile, the jobless rate is expected to hold steady at 4.7% while wages are expected to maintain February’s pace by printing a 0.2% month-on-month increase.

Looking at the available leading indicators, Markit’s manufacturing PMI reading for March dropped from 54.2 to 53.3, mainly because new orders increased at the weakest pace since October 2016. With regard to employment, however, commentary from Markit noted that the survey results are “consistent with official manufacturing payroll numbers falling slightly.”

Moving on, Markit’s services PMI reading fell from 53.8 to a six-month low of 52.8 in March, also because of weaker new orders growth. And sadly, commentary from Markit noted that the rate of service sector job creation in March “was the weakest recorded by the survey since last October.”

Next, ISM’s manufacturing PMI also printed a deterioration, albeit not as severe as Markit’s report, since ISM’s manufacturing PMI reading only tumbled from 57.7 to 57.2. And contrary to Markit’s report of falling employment in the manufacturing sector, ISM’s employment index surged from 54.2 to 58.9, which is the best reading since June 2011. Not only that, 14 out of 18 manufacturing industries reported higher payroll numbers in March.

As for ISM’s non-manufacturing PMI, the headline reading slumped from 57.6, the highest reading since October 2015, to a five-month low of 55.2. And the employment index also slumped, from 55.2 to 51.6, which implies that there’s still jobs growth but much slower compared to February.

Finally, the March ADP report printed another upside surprise by coming in at +263K (+184K expected). However, February’s awesome +298K reading was drastically downgraded to +245K. That’s a 53K reduction right there!

Looking at historical trends, the U.S. economy usually generates a lot of jobs during the March period. However, seasonal adjustments mean that the seasonally-adjusted reading is usually significantly lower.

March NFP: Seasonal Adjustments

Moreover, economists have a tendency to overshoot their estimates, resulting in more downside surprises. Although it should be pointed out that last year was one of those few years when economists somehow undershot their forecasts, resulting in an upside surprise.

March NFP: Expected vs. Actual

In summary, the available leading indicators are mixed, since Markit reported weakness in the manufacturing sector while ISM reported an acceleration in jobs growth, also in the manufacturing sector. With regard to the service sector, both Markit and ISM reported a drastic slowdown in employment growth. Only the ADP report printed an upside surprise. However, not everything is awesome, since the previous reading for ADP’s net change in non-farm employment was drastically downgraded.

Notwithstanding the leading labor indicators, the probability seems skewed more towards a downside surprise, given that economists have a historical tendency to overshoot their forecasts, resulting in far more downside surprises.

In any case, just keep in mind that a better-than-expected reading for non-farm employment usually entices Greenback bulls to pounce and stage a quick rally. On the flip side, a miss usually invites the bears to attack instead.

Also, keep in mind that even if the reading is a miss, follow-through selling is generally unlikely if non-farm employment is still above 100K, which is the minimum number of jobs needed to keep up with working-age population growth and keep rate hike expectations alive. Although that also depends on the other labor indicators. And as we saw last time around, market players usually have their sights on wage growth.