NFP Prep: A 200k+ reading possible, but wages will reign supreme
City Index October 2, 2015 1:50 AM
<p>The September Non-Farm Payroll report will be released tomorrow at 8:30 ET (12:30 GMT, 1:30pm BST), with expectations centered on a headline print of 202k […]</p>
The September Non-Farm Payroll report will be released tomorrow at 8:30 ET (12:30 GMT, 1:30pm BST), with expectations centered on a headline print of 202k after last month’s muddy 173k reading. My model suggests that the report could slightly exceed these expectations,with leading indicators suggesting a September headline NFP reading of 219K.
The model has been historically reliable, showing a correlation coefficient of 0.90 with the unrevised NFP headline figure dating back to 2001 (1.0 would show a perfect 100% correlation). As always, readers should note that past results are not necessarily indicative of future results.
Compared to last month, the leading indicators for the non-farm payrolls report are mixed. Bulls will latch on to the improvement in the ADP employment report (from 190k to 200k) and initial jobless claims in the survey week (down from 277k to a historically low 267k). However, we also saw a notable deterioration in the Manufacturing PMI employment component, which dropped to 50.5, on the precipice of dropping below the boom/bust line at 50. Unfortunately, the ISM Services report, which is usually seen as one of the strongest leading indicators for NFP, will not be released until next week.
With the Federal Reserve punting on its decision to raise interest rates until (likely) December, this NFP report may be less impactful than most, as few market participants expect the central bank to act at its October meeting. That said, dollar bulls still want to see strong growth in the labor market, whereas equity traders may prefer the potential for more low interest rates that a weaker report could bring. Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:
|NFP Jobs Created||Likely USD Reaction||Likely Equity Reaction|
|< 180k||Bearish||Slightly Bullish|
As always, traders should monitor both the overall quantity of jobs created as well as the quality of those jobs. To that end, the change in average hourly earnings could be just as critical as the headline jobs figure. Last month’s report provided a perfect example of this phenomenon, when the relatively strong 0.3% rise in wages offset the slight disappointment in total jobs. Another 0.3%+ increase in wages would go a long way toward alleviating the Fed’s near-term concerns about inflation.
Historically, USD/JPY has one of the most reliable reactions to payrolls data, so traders with a strong bias on the outcome of the report may want to consider trading that pair.
Though this type of model can provide an objective, data-driven forecast for the NFP report, experienced traders know that the U.S. labor market is notoriously difficult to predict and that all forecasts should be taken with a grain of salt. As always, tomorrow’s report may come in far above or below my model’s projection, so it’s absolutely essential to use stop losses and proper risk management in case we see an unexpected move. Finally, readers should note that stop loss orders may not necessarily limit losses in fast-moving markets.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.