NFP Prep: Will this month’s report be the cherry on top of the Fed’s liftoff sundae?

<p>The November Non-Farm Payroll report will be released tomorrow at 8:30 EST (13:30 GMT) with expectations centered on a headline print of 201k after last […]</p>

The November Non-Farm Payroll report will be released tomorrow at 8:30 EST (13:30 GMT) with expectations centered on a headline print of 201k after last month’s blowout 271k reading. My model suggests that the report could exceed these expectations once again,with leading indicators suggesting an October headline NFP reading of 224K.

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.

nfp12-3-2015 11-33-30 AM

Source:Bureau of Labor Statistics, City Index

Compared to last month, the leading indicators for the non-farm payrolls report were mixed. In support of a stronger NFP print, the ISM Manufacturing PMI employment reading rose nearly four points from 47.6 to 51.3, suggesting that manufacturing could contribute positively to this month’s NFP report. Meanwhile, the ADP non-farm employment measure also rose to 217k, a five-month high. On the other side of the coin, both ISM Non-Manufacturing PMI employment (from 59.2 to 55.0) and Initial Jobless Claims (from 259k to 272k) worsened in November, though they still remain at relatively strong levels vs. the recent past.

Trading Implications

With the persistently hawkish rhetoric out of the Federal Reserve lately, traders view a December rate hike as the odds-on, but not guaranteed, proposition. Accordingly, this jobs report may serve as the last potential stumbling block before ahead of the Fed’s highly-anticipated meeting in two weeks. In our view, it would take a particularly weak NFP reading to deter the Fed from “liftoff.” 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
< 150k Slightly Bearish Slightly Bullish
150k-200k Slightly Bullish Neutral
> 250k 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. Last month’s report showed a strong 0.4% m/m growth in wages, and another strong reading on this measure would go a long way toward cementing expectations for a December rate hike.

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.

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