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Research Note: April US NFP Report
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: The April U.S. Employment Report is scheduled to be released Friday May 8th, at 0830EDT/1230GMT. We expect the NFP report to show a loss of -550K after -663K (consensus -600K) and for the unemployment rate to increase to 9.0% from 8.5% (consensus 8.9%). The consensus estimates do not accurately reflect what we think are revised market expectations for a smaller NFP job loss, which we see as being centered on -530K to -550K area, and which we will use to gauge the actual result. In this context, a NFP reading of -500K or fewer will be viewed as better than expected, while a result of -600K or more will likely be viewed as worse than expected, even though it's the consensus of economists' estimate. The unemployment rate could prove pivotal and an above consensus jump to 9.0% may prove disconcerting to risk sentiment. As always, be mindful of revisions to prior periods.
Trading Strategy: The FX reaction is likely to closely follow the reaction in stocks and overall risk appetites yet again, which seems to have had little correlation to the data itself and have tended to simply extend the prior directional trend. The current trend in risk appetites is higher, and a better than expected NFP print might be construed as further evidence that the environment is stabilizing, fueling further gains. However, the price action in risky assets over the last couple of days suggests to us that the current trend higher in risky assets may be topping out and set for pullback.
If that is the case, the tell-tale reaction to a better than expected number would be for risky assets to briefly rally following the data release (stocks up, JPY-crosses up, USD down), only to then reverse and fall below pre-announcement levels. If that happens, we would look to buy the USD against all but the JPY and to sell JPY-crosses. We would also be sellers of Gold and Silver on such a move. The risk is that a downside reversal in risk assets begins overnight and we are at lower levels going into NFP. If that situation develops, we would then use any post-announcement move up in JPY-crosses/dip down in USD to sell JPY-crosses and buy the USD. We will stop out of such positions if prior JPY-cross highs/USD lows are exceeded by more than 30-40 pips. A worse than expected NFP/unemployment reading may see risk appetites retreat directly.
Data Analysis: The employment data garnered throughout the month point to a better than consensus nonfarm payroll decline of -550K in April. The market is expecting a more aggressive -600K drop following a -663K slip the prior month. In terms of the positives, initial jobless claims ground down to a four-week moving average of 638K from 658K while the employment components in both ISM surveys saw nice rebounds. The ADP employment report flashed a healthier picture of the services space as well, printing a much better than expected -491K decline in payrolls after a -708K result the prior month. The average miss in the ADP in terms of predicting the NFP number has been plus or minus 50K over the last 12 months. This would suggest an NFP read between -440K and -540K is in the works. Continuing claims, however, hit a fresh cycle high of 6.35 million and suggest that finding a job once you lose it remains a challenge. This troubling number is behind our estimate that the unemployment rate may rise to an above consensus 9.0% for the month (market forecasting 8.9%) from the current 8.5%. Indeed, the insured unemployment rate jumped to 4.8% in April from 4.4% prior and continues to point to an above 9.0% total rate in the very near future.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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