NFP Preview: How Jobs Could Still Drive Volatility Despite Iran Focus

NFP Key Points

• NFP report expectations: +59K jobs, +0.3% m/m earnings, unemployment at 4.3%.
• NFP leading indicators point to a potentially above-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 100-130K range.
• USD/JPY has rallied up to test its 6-week high in the upper-157 area and could extend its gains toward 1.5-year highs near 159.00 if the jobs report beats expectations.

When is the February NFP Report?

The February NFP report will be released on Friday, March 6, at 8:30 ET.

NFP Report Expectations

Traders and economists expect the NFP report to show that the US created 59K net new jobs, with average hourly earnings rising 0.3% m/m (3.7% y/y) and the U3 unemployment rate at 4.3%.

NFP Overview

Developments in the Middle East are undoubtedly top of traders’ minds at the moment, but that doesn’t mean we should ignore “Tier 1” economic reports, and the most important jobs report from the world’s largest economy certainly fits that bill.

Last month brought a stronger-than-expected reading on the US labor market, with jobs rising +130K in January, the unemployment rate falling to 4.3%, and average hourly earnings rising by a solid 0.4% m/m. Expectations for February’s jobs report are more muted, pointing to a reversion back to the “low hire, low fire” regime that has characterized the past year or so:

Source: StoneX

As the graphic above shows, traders are essentially anticipating a “steady as she goes” jobs report, with modest job growth, stable unemployment, and continued gradual wage increases.

Combined with sticky inflation above the Federal Reserve’s 2% target (not to mention the potential for an uptick in inflation from rising oil prices to start March), it seems a near forgone conclusion that the Federal Reserve will leave interest rates unchanged at the end of the month; no change is currently priced at 97% per the CME’s FedWatch tool.

Where it gets more interesting is looking out to Jerome Powell’s last meeting as the Chairman of the Federal Reserve in April, where traders are currently pricing only a 15% probability of an interest rate cut:

Source: CME FedWatch

Once Powell’s term comes to an end, presumptive Fed Chairman Kevin Warsh may be more aggressive in delivering monetary policy easing, but unless or until we see the jobs market stall or inflation fall sharply, the current 3.50%-3.75% rate range is likely to remain in place.

NFP Forecast

As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report:

• The ISM Services Employment subindex rose to 51.8 from 50.3 last month.
• The ISM Manufacturing Employment subindex held steady at 48.8 from 48.1 last month.
• The ADP Employment report came in at 63K jobs, up from last month’s 11K reading.
• The 4-week moving average of initial unemployment claims edged higher to 220K, up from 212K last month but still below most of last year’s readings.

Weighing the data and our internal models, the leading indicators point to a potentially above-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 100-130K range, albeit with a big band of uncertainty given the limited response rates.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, including the closely-watched average hourly earnings figure and unemployment rate will also impact how markets react to the release.

Potential NFP Market Reaction

	Wages < 0.2% m/m	Wages 0.2-0.4% m/m	Wages > 0.4% m/m
< 20K jobs	Bearish USD	Slightly Bearish USD	Neutral USD
20-120K jobs	Slightly Bearish USD	Neutral USD	Neutral USD
> 120K jobs	Neutral USD	Slightly Bullish USD	Bullish USD

Technically speaking, the US dollar is trading near the top of its 3-month range after rallying to start the week, leading to a balanced-to-slightly-bearish-skewed risk profile around the release.

US Dollar Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

As we’ve noted before, USD/JPY is the currency pair that tends to have the “cleanest” or most logical reaction to US data. Technically speaking, USD/JPY has rallied up to test its 6-week high in the upper-157 area. Given the gradual nature of the rally, the 14-day RSI remains in neutral territory, hinting at the potential for a move in either direction depending on the outcome of the NFP report.

In the event of a stronger-than-expected jobs report, USD/JPY may break above 158.00, bringing the 1.5-year highs near 159.00 into play, whereas a weaker-than-anticipated reading on the labor market could lead to a pullback below 156.00, though traders may be keen to buy the dip until there are confirmed signs that a resolution to the US-Iran war is coming.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX