NFP Preview: What Would it Take for the Fed to Cut in March?

NFP Key Points

• NFP report expectations: +70K jobs, +0.3% m/m earnings, unemployment at 4.4%.
• Perhaps the most important aspect of this month’s jobs report will be the benchmark revisions to past NFP reports, with the potential for -1M jobs to revised away.
• A weak report and/or large downward revisions would likely take USD/JPY though near-term support and bring the lower 154.00s into play next.

When is the January NFP Report?

The January NFP report will be released on Wednesday, February 11, at 8:30 ET.

NFP Report Expectations

Traders and economists expect the NFP report to show that the US created 70K net new jobs, with average hourly earnings rising 0.3% m/m (3.6% y/y) and the U3 unemployment rate at 4.4%.

NFP Overview

Another month, another shutdown-delayed NFP report.

Just when economic data had finally recovered from the record-long government shutdown in Q4, we saw another (brief) shuttering last month that has pushed last week’s US jobs report to this Wednesday. Heading into the latest update on the jobs market, economists believe the US labor market extended its “low hire, low fire” regime in January:

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.

However, there are some yellow (if not outright red) flags for the labor market among last month’s leading indicators. For one, the JOLTS survey showed job openings fell to their lowest level since COVID at just 6.54M; removing COVID’s one-off disruption, this is the worst reading for the indicator since early 2018. Likewise, the spike in initial unemployment claims to near 5-month highs has some analysts worried that the “low fire” regime of the jobs market may be morphing toward a “medium fire” environment without a corresponding increase in hiring.

Perhaps the most important aspect of this month’s jobs report will be the benchmark revisions to past NFP reports. Given the tight timeline and low response rates with the monthly NFP report, the BLS periodically revises past jobs reports as it gets more thorough data.

These benchmark revisions will cover the 12-month period through March 2025, so it’s not particularly timely data, but they’re expected to show a large negative revision that indicates that the labor market may not have been as strong as anticipated last year. The preliminary estimate was on the magnitude of -900K jobs, with losses concentrated in leisure & hospitality, professional services, retail, wholesale, and manufacturing. If this estimate is revised higher, especially above the psychologically-significant 1,000,000 level, it could prompt traders to view the whole release as a negative sign, even if this month’s jobs figures come in near expectations.

Against this backdrop, traders are starting to consider the potential for an interest rate cut by the Federal Reserve as soon as next month. As the chart below shows, traders are currently pricing in about 1-in-6 odds of a rate cut next month, and weaker-than-expected reading or large negative revisions could bump these odds closer to 33%+, especially if Friday’s CPI report shows falling price pressures:

Source: CME FedWatch

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 fell to 50.3 from 52.0 last month.
• The ISM Manufacturing Employment subindex rose to 48.1 from 44.9 last month.
• The ADP Employment report came in at 22K jobs, down from last month’s 37K reading.
• The 4-week moving average of initial unemployment claims came in steady at 212K, flat from last month’s reading.

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 90-130K 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	Neutral USD	Neutral USD	Neutral USD
> 120K jobs	Neutral USD	Slightly Bullish USD	Bullish USD

Technically speaking, the US dollar is trading near the middle of its 3-month range after rallying late last week, leading to a balanced 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 remains in a long-term uptrend, driven in part by fears of large fiscal spending in Japan, a theme that was reinforced by Prime Minister Takaichi’s resounding win in last weekend’s snap election.

Ahead of the NFP report, the pair is testing support at its 50-day EMA and the 38.2% Fibonacci retracement of late-January to early-February rally near 1.5550. A solid NFP report that essentially takes a Fed rate cut in March off the table could lead to a bounce in the pair, with previous-support-turned-resistance around 157.50 as the next level of resistance to watch. Meanwhile, a weak report and/or large downward revisions would likely take USD/JPY though near-term support and bring the confluence of the 100-day MA and 61.8% Fibonacci retracement in the lower 154.00s into play next.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX