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NFP Preview: A Strong Report Could Accelerate Dollar Recovery

One of the closely-watched macroeconomic numbers is due for release on Friday as the US Bureau of Labor publishes the nonfarm payrolls report. Traditionally, this monthly jobs report has been one of, if not the biggest, data release in terms of its impact on the markets. But over the past several months, this has been largely ignored by markets as all investors cared about were more stimulus and optimism surrounding the vaccine developments. But now that the COVID vaccines are being rolled out, investors will be paying closer attention to data as they anticipate the Fed’s next move. Although tapering QE is still a few quarters away at the earliest, if we start to see consistent improvement in US data then this will only raise speculation over a quicker start to Fed’s balance sheet normalisation process. So, going forward, the NFP reports are likely to be scrutinized closely once again.

Last month, the jobs report disappointed as the economy lost 140,000 jobs, the first negative showing since April. But for the month of December, we could see a positive outcome. That’s because the three main leading indicators that I normally use to determine the likelihood of the official non-farm jobs report beating or missing expectations, all improved from their December readings and beat expectations:

  • ISM Manufacturing employment component: 52.6 vs. 51.7 in Dec, rising 0.9 points (headline PMI 58.7 vs. 60.0 expected)
  • ISM Services employment component: 55.2 vs. 48.7 in Dec, rising 6.5 points (headline PMI 58.7 vs. 56.7 expected)
  • ADP +174K vs. +48K expected and -78K last (revised from -123K)

In particular, it was the big rebound in the employment component of the ISM services sector PMI that looked the most impressive to me, pointing to increased hiring in the dominant sector of the economy.

Other job indicators also positive

Among some of the other employment indicators, the Challenger Job Cuts only rose 17.4% y/y in December compared to 134.5% the month before. Meanwhile, weekly jobless claims released through January were mostly better than expected, suggesting more people are coming off benefit and getting jobs. As a result, I am expecting to see a decent rebound in nonfarm payrolls.

Analyst expectations

  • Non-Farm Employment Change 62K vs. -140K last
  • Unemployment Rate seen unchanged at 6.7%
  • Average Hourly Earnings expected +0.3m/m vs. +0.8% previous month

As mentioned, the pre-NFP leading indicators were all better-than-expected and with the services sector employment component looking quite rosy, I think there is a good chance we could headline NFP come in sharply above expectations.

NFP trade ideas

In the event of a massive beat, I would favour looking for long positions in risk sensitive assets, including stock indices and the USD/JPY.

However, if the data disappoints, then going long GBP/USD is something I would consider given the pound’s ongoing strength, especially after the Bank of England said it does not want to signal that negative rates are coming even though it would prepare for sub-zero rates if needed, and as it also revised its 2020 GDP forecast upwards to 7.25% from 6.25% in November, adding: “GDP is projected to recover rapidly towards pre-COVID levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns.”

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