Are Expectations for Non-Farm Payroll Too Frothy?
The bar is set high for Friday’s non-farm payrolls report. Currently, economists expect non-farm payrolls to rise by 190k, which would be the strongest pace of job growth in 3 years. However with individual forecasts ranging from a high of 300k to a low of 75k, there is no real consensus outside of the expectation for positive job growth. With the U.S. economy improving and contribution from census related jobs, there is no question that more jobs were created than lost in the month of April. The labor market has turned a corner and the era of consistent job losses is for the most part, over. But will that be enough for a market that is consumed by risk aversion? The employment component of service sector ISM is our most reliable leading indicator for non-farm payrolls and the surprising decline last month signals tepid private sector payroll growth. The index contracted for the 28th consecutive month which means that of the companies surveyed, there were more layoffs than new hires. With tomorrow’s non-farm payrolls report, there are 2 central questions to consider. The first is whether the market’s expectations are too lofty and the second is whether a strong report will be enough to cause in a relief rally in the currency and equity markets. We will tackle these two questions separately:
Q1: Are Expectations for Non-Farm Payroll Too Frothy?
Arguments for Better Non-Farm Payrolls:
1. ADP Reports Private Sector Jobs Gain 32K
2. Conference Board Consumer Confidence Climbs to Highest Since Lehman Bankruptcy
3. Employment Component of Manufacturing Sector ISM Registers 5th Month of Growth
4. Challenger Layoffs Reaches Lowest in 4 Years
5. Monster.com Index Rises 8 points
6. Census Hiring
Arguments for Weaker Non-Farm Payrolls:
1. 4-Week Average Claims Jump by 1500
2. Continuing Claims Makes Slight Gain
3. Employment Component of Service Sector ISM Contracts for 28th Month
4. University of Michigan Consumer Confidence Declines Slightly to 72.2
Every month we take a look at a handful of leading indicators for non-farm payrolls. Although there are certainly more reasons to believe that payrolls will increase than decrease, the handful of labor market indicators that have deteriorated signal that private sector payroll growth may not be as strong as the market expects. According to ADP, the economy added the jobs for the third month and posted its biggest gain since early-2008. The Conference Board Index on Consumer Confidence indicated that individuals are feeling less concerned about job security, as the index reached its highest point since the start of the credit crisis. Manufacturing has been a big contributor to growth in the past month and according to the ISM report, job growth registered for the fifth consecutive month. Challenger Grey & Christmas also announced the smallest amount in layoffs in 4 years while the Monster.com index of online job ads rose by a whopping 8 points. However at the same time, the 4 week average of jobless claims increased over the past month along with continuing claims. Most importantly, the indicator that we turn to most to help predict the jobs number turned sour this month. The service sector’s ISM Employment Component has failed to exceed the 50.0 threshold, marking its 28th consecutive month of contraction.
According to the Census Bureau, another 800k people are expected to be hired between April and May. Nearly all of these jobs are temporary because once the census survey is finished, these workers will no longer be needed. As a result, the real number to watch will be private sector payrolls. Yet the fact that census workers have jobs at all means they will be a little bit more generous with their spending which should stimulate the economy.
What Is the Market Expecting?
Here are the forecasts for the April Non-Farm Payrolls Report:
Q2: Will Strong U.S. Job Growth Be Enough to Turn Around Sentiment?
The more important question is whether strong job growth will be enough to turn around sentiment. The price action in the financial markets over the past 3 days indicates that investors are extremely risk averse. A strong NFP number usually lifts the euro but in this case, it may make the dollar even more attractive. The impact on the greenback against the Japanese Yen is clear in that a strong number should at minimum trigger a relief rally in USD/JPY. However the fear is caused by concerns about a sovereign debt crisis in Europe and therefore can only be resolved when these concerns recede. Therefore this month’s non-farm payrolls report may not help risk appetite as much as previous months. Non-farm payrolls are a notoriously volatile piece of data to trade as revisions and expectations also impact the market’s reaction. Traders should remember that the first reaction to the non-farm payrolls report is usually not the one that lasts for the rest of the trading day and the best currency pair to trade is USD/JPY because of its logical reaction to U.S. data. Even though the direction associated with each month’s move has not always been the same, the immediate reaction is typically not sustained, and eventually reversed into a more substantial move that lasted for the course of the trading day. So when it comes to trading non-farm payrolls, it pays to wait.
Similar Posts:
- Will Non-Farm Payrolls Save the Dollar?
- ADP Numbers Create Suspicion About Non-Farm Payrolls
- R.I. jobless down to 10.8%
- Rhode Island’s leading economic indicators’ growth slows
- Corpus Christi’s unemployment rises slightly in November
