NFP Preview: Reasons for optimism?

Traders believe that the labor market will show 60k new jobs and wages anticipated to rise 0.3% m/m. Are these expectations justified?

Jobs 3

Background

After last month’s rather depressing Non-Farm Payroll report, which itself closed out one of the more depressing weeks in US history, there are some signs that this month’s jobs report could bring cause for optimism.

Most Americans received desperately-needed $600 stimulus checks in January (and there’s increasing confidence that another round of fiscal stimulus is on the way), vaccine distribution continued apace, and the country ultimately saw a smooth transition of power to new political leadership. While there’s no doubt that dark days still lie ahead, traders believe that the labor market will see improvement, with estimates for job creation near 60k and wages anticipated to rise 0.3% m/m.

Are these expectations justified? We dive into the key leading indicators for Friday’s critical jobs report below!

Source: GAIN Capital

NFP forecast

As regular readers know, there are four historically reliable leading indicators that we watch to help handicap each month’s NFP report:

  • The ISM Non-Manufacturing PMI Employment component surged to 55.2, a 6.5-point improvement over last month’s 48.7 reading.
  • The ISM Manufacturing PMI Employment component improved modestly, rising to 52.6 from 51.7 last month.
  • The ADP Employment report saw solid growth of 174k net new jobs, well above last month’s upwardly-revised -78k reading.
  • Finally, the 4-week moving average of initial unemployment claims rose to 848k, up slightly from last month’s 837k reading.

As we’ve noted repeatedly over the last few months, traders should take any forward-looking economic estimates with a massive grain of salt given the truly unparalleled global economic disruption as a result of COVID-19’s spread. That said, weighing the data and our internal models, the leading indicators point to a potentially better-than-expected reading from the January NFP report, with headline job growth potentially seeing an increase of 100-200k jobs, albeit with a bigger band of uncertainty than ever given the current state of affairs.

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, prominently including the closely-watched average hourly earnings figure, will likely be just as important as the headline figure itself.

Potential market reaction

Earnings < 0.2% m/m

Earnings 0.2-0.4% mm

Earnings > 0.4% m/m

< 0 jobs

Bearish USD

Slightly bearish USD

Neutral USD

0-120k jobs

Slightly bearish USD

Neutral USD

Slightly bullish USD

> 120k jobs

Neutral USD

Slightly bullish USD

Bullish USD

After getting walloped through the last three quarters of 2020, the US dollar has staged a (so far tepid) recovery in 2021, and Friday’s NFP report will help determine whether the world’s reserve currency can keep the rally going through February.

If we see a stronger-than-anticipated NFP reading, traders may look to the EUR/USD as a possible candidate. The world’s most widely-traded currency pair is testing its 100-day EMA at 1.1975 as of writing, and a break below that indicator for the first time in over six months could open the door for continued downside in the coming weeks.

On the other hand, GBP/USD is poised to benefit from a potentially soft jobs report. The pair is in the middle of its 5-month bullish channel and has generally held up well despite strength in the greenback against other major rivals, pointing to the potential for the pair to lead the way higher if the buck resumes its longer-term downtrend.

Learn more about forex trading opportunities.


More from NFP

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. 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 or CFD contract. 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. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. 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.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.