NFP Prep: The fog of war is thicker than usual

<p>*Please note that this marks my last day working at GAIN Capital/City Index. It’s been an absolute pleasure to work for such a tremendous group […]</p>

*Please note that this marks my last day working at GAIN Capital/City Index. It’s been an absolute pleasure to work for such a tremendous group of individuals and a great honor to grace our traders’ computer screens over the years. Be sure to stay in touch by following me on twitter: @MWellerFX*

 

The March Non-Farm Payroll report will be released tomorrow at 8:30 EST (13:30 GMT) with expectations centered on a headline print of 206 after last month’s strong 242k reading.

Unfortunately, due a quirk in the calendar this month, the NFP report will be released before two of the most reliable indicators, the ISM Services and Manufacturing PMI figures. Therefore, the notoriously difficult-to-handicap release will be shrouded in even more uncertainty than usual this time around. That said, the leading indicators that we do have in hand still point to another decent report: during the NFP survey week, initial unemployment claims were essentially unchanged relative to last month at a historically low level (259k), while yesterday’s ADP Non-Farm Employment report came out in-line with expectations  at 200k.

Trading Implications

If Fed Chair Janet Yellen’s speech earlier this week is to be believed, the Fed has seemingly shifted into an even more dovish (technically “less hawkish”) posture of late, so this month’s job report would have to be truly spectacular to move the needle on interest rate expectations. As of writing, Fed Funds futures traders are pricing in only a 22% probability of a rate hike in June and only a 57% chance of a rate hike at all this year, according to the CME’s FedWatch tool.

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
< 175k Bearish Slightly Bullish
175k-275k Neutral Neutral
> 275k Slightly Bullish Slightly Bearish

 

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, especially with many FOMC voters looking for signs of inflation on the horizon before raising interest rates. Wages actually contracted 0.1% month-over-month in February’s jobs report, so dollar bulls will want to see growth return before declaring the report as strong, regardless of the total number of jobs created.

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.

For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom)

Join our live webinars for the latest analysis and trading ideas. Register now

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.

For further details see our full non-independent research disclaimer and quarterly summary.