Highlights
- NFP Prep: Onward and Upward?
- Another View: Reversion Likely after Last Month's Stellar Reading
- View How Our NFP Forecasts Compare
1. NFP Prep: Onward and Upward?
By: Neal Gilbert, Senior Market Strategist
This month my Non-Farm Payroll model is predicting a healthy 248k increase in jobs in May 2014, and if achieved would likely be viewed positively by US economy watchers. Strangely enough, this month’s NFP release almost feels like it’s an afterthought. There has been so much data released so far this week that we may be bordering on information overload, and investors may simply choose not to react to the NFP unless it is monumentally bad: like less-than-100k bad.
Factoring into the malaise for this NFP is that we already know the Federal Reserve appears bent on continuing to taper Quantitative Easing, the European Central Bank threw everything but the kitchen sink in to their monetary policy the day previous, and we are well into the warmer months in North America, a time when many traders take a self-imposed sabbatical. Regardless, NFP historically has a strong reaction no matter the timing, and this month may be no different.
Using my prediction model had previously required me to take last month’s result and either add to or subtract from it based on ten employment reports released before NFP; however, all of the weather related craziness in the first quarter of 2014 created a challenge to that doctrine in that previous results were anticipated to be revised substantially higher. While that anticipation turned out to be inherently incorrect, my prediction was actually fairly accurate utilizing my new method of calculation. Therefore, I will continue to repeat the method of using a three month average which takes into consideration the possibility of a revision. So instead of using 288k as my base (last month’s result), it will now be 238k (an average of 222k February, 203k March, and 288k April).
Here is the breakdown of the leading employment reports:
Leading Event
|
Current Release
|
Previous Release
|
Good or Bad for NFP?
|
ADP Employment Change
|
179k
|
215k
|
Bad
|
ISM Non-Manufacturing PMI Employment Subcomponent
|
52.4
|
51.3
|
Good
|
Markit Services PMI Employment Subcomponent
|
52.8
|
51.2
|
Good
|
ISM Manufacturing PMI Employment Subcomponent
|
52.8
|
54.7
|
Bad
|
Markit Manufacturing PMI Employment Subcomponent
|
53.7
|
53.7
|
Neutral
|
Initial Jobless Claims 4-Week Moving Average
|
311.5k
|
316.75k
|
Good
|
Challenger Job Cuts
|
52.961
|
40,298
|
Bad
|
Continuing Jobless Claims
|
2.631M
|
2.68M
|
Good
|
ISM New York Employment Subcomponent
|
50.3
|
43.1
|
Good
|
Chicago PMI Employment Subcomponent
|
Fell slightly.
|
Rebounded, nearly offsetting March’s decline.
|
Bad
|
Overall
|
Good
|
As you can see from the table above, the majority of the employment indicators gave a positive score, which gives the impression that we should see a positive NFP result: just like last month. Unlike last month, though, we actually have all of the available metrics for our prediction, hopefully making it more accurate. Taking all these numbers together, I came up with my NFP estimation of 248k new jobs created in the month of May. This is better than the consensus estimate of around 210k-220k, and could prompt many traders to scratch their heads as to what they should do.
Any figure above 200k would be encouraging for the growth of the US economy, but it also means that the Federal Reserve would likely continue moving closer to, and perhaps even accelerate, the end of Quantitative Easing and an eventual interest rate hike, maybe as soon as six months after QE’s demise. Therefore, I could see an initial surge in currency pairs like the USD/JPY, but that momentum could be quickly lost as investors become more accustomed to a world without the Fed’s consistent stimulus injection.
2. Another View: Reversion Likely after Last Month’s Stellar Reading
By: Matt Weller, Senior Technical Analyst
The May Non-Farm Payroll report will be released tomorrow at 8:30 ET (13:30 GMT), with expectations centered on a headline print of 220k new jobs. My proprietary NFP prediction model suggests that the NFP report will come in below these expectations, with leading indicators suggesting a May headline NFP reading of just 184k.
The model has been historically reliable, showing a correlation coefficient of .90 with the unrevised NFP headline figure dating back to 2001 (1.0 would show a perfect 100% correlation). As always, readers should note that past results are not necessarily indicative of future results.
Source: FOREX.com and BLS
Employment indicators this month were mixed: ISM Service PMI employment improved slightly over last month’s reading, as did Initial Jobless Claims, but both the ADP employment report and ISM Manufacturing PMI employment fell.
Trading Implications
Last month, traders were treated to a stellar jobs report as hiring bounced back sharply after a slow, weather-subdued start to 2014. However, April’s strong reading may have set the bar too high, especially given the marginal expansion indicated by the leading indicators. If we do see a disappointing reading (<180k), the U.S. dollar and global equities may pull back after rallying sharply over the past month. Conversely, another strong reading (>250k) could add more fuel to the USD’s ascent, likely supporting equities in the process. The table below highlights three possible scenarios for this month’s NFP report, along with the likely market reaction:
NFP Jobs Created
|
Likely USD Reaction
|
Likely Equity Reaction
|
< 180k
|
Slightly Bearish
|
Slightly Bearish
|
180k - 250k
|
Slightly Bullish
|
Neutral
|
> 250k
|
Bullish
|
Slightly Bullish
|
At the end of the day, the market reaction may be somewhat subdued, as it appears that the Fed is set on its current taper timeline barring any major surprises, and it’s still too premature to start drawing conclusions about the first interest rate hike, which is likely around a year away based on recent Fed comments.
Typically, USD/JPY has one of the most reliable reactions to payrolls data, so traders with a strong bias on the outcome of the report may want to focus on trading that pair.
Though this type of model can provide an objective, data-driven forecast for the NFP report, readers should note that the U.S. labor market is notoriously difficult to predict and that all forecasts should be taken with a grain of salt. As always, tomorrow’s report may come in far above or below my model’s projection, so it’s absolutely essential to use stop losses and proper risk management in case we see an unexpected move. Also, please be aware that placing contingent orders will not necessarily limit your losses.
3. View How Our NFP Forecasts Compare
Month
|
Consensus
|
Matt’s Prediction
|
Neal’s Prediction
|
Actual Result
|
Matt’s Discrepancy
|
Neal’s Discrepancy
|
June 2013
|
167k
|
101k
|
167k
|
175k
|
66k
|
8k
|
July 2013
|
163k
|
126k
|
221k
|
195k
|
69k
|
26k
|
Aug. 2013
|
184k
|
170k
|
253k
|
162k
|
8k
|
91k
|
Sept 2013
|
178k
|
172k
|
162k
|
169k
|
3k
|
7k
|
Oct. 2013
|
182k
|
180k
|
191k
|
148k
|
32k
|
43k
|
Nov. 2013
|
121k
|
116k
|
135k
|
204k
|
88k
|
69k
|
Dec. 2013
|
182k
|
185k
|
222k
|
203k
|
18k
|
19k
|
Jan. 2014
|
196k
|
184k
|
277k
|
74k
|
110k
|
203k
|
Feb. 2014
|
185k
|
160k
|
126k
|
113k
|
47k
|
13k
|
Mar. 2014
|
150k
|
131k
|
151k
|
175k
|
44k
|
24k
|
Apr. 2014
|
199k
|
164k
|
150k
|
192k
|
28k
|
42k
|
May 2014
|
216k
|
205k
|
217k
|
288k
|
83k
|
71k
|
Averages
|
50k
|
51k
|
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