April Non-Farm Payrolls Preview: The Charts that Matter

Last updated 5/7/2009 2:29 PM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

The tone of the markets is starting to change. We are no longer bracing ourselves for another panic, but preparing for recovery.  The past month has shown that this optimism is not misplaced as the economy is clearly improving. Federal Reserve Chairman Ben Bernanke assured markets this week that the economy is bottoming, with a potential turn by year-end. This month has seen the S&P 500 recoup nearly all of its year-to-date losses, better-than-expected earnings from the battered financial sector, and a string of upside surprises in economic numbers. Even though there is no question that we are destined to see the sixteenth straight month of job losses, there is a very good chance that the payrolls number will be better than expected.  The outside risk this time is for job losses to escalate.

Despite the sell-off in the U.S. equity market, most of the major currencies have extended their gains against the U.S. dollar which indicates that risk appetite is improving.  The EUR/USD's chance of cracking above the 1.35 level and USD/JPY's odds of hitting 100 will be contingent upon how much of a surprise we have in non-farm payrolls.  There is a very good chance that non-farm payrolls could fall by less than 600k and possibly even less than 550k.  We would not even rule out a smaller than 500k decline in jobs last month.  If payrolls beat expectations, it would fuel speculation about a bottom in the labor market, and drive the U.S. dollar lower against all higher yielding currencies like the euro, Australian and New Zealand dollars.  The only currency that the dollar would strengthen against on a positive non-farm payrolls report is the Japanese Yen.   

So what makes us believe that non-farm payrolls could surprise to the upside?  

Every month, we take a look at ten leading indicators for non-farm payrolls and 9 out of the10 last month point to smaller job losses.   

Arguments for Better Non-Farm Payrolls:

1.    Employment Component of Service Sector ISM Rebounds

2.    Employment Component of Manufacturing Sector Increases

3.    ADP Report Private Sector Job Losses at 491,000; Fewest Since October

4.    Challenger Layoffs Rise by Only 47%, Least Since September

5.    University of Michigan Consumer Confidence Jumps Most in Two Years

6.    Conference Board’s Sentiment Index Rises Most Since 2005

7.    4-Week Average Claims Fall By 14,750

8.    Monster.com Employment Index Rises 2 Points in April  

9.    Zero Strike Activity

Arguments for Weaker Non-Farm Payrolls:

Non-Farm Payrolls vs. Employment Component of ISM

As you can see, there is a VERY strong correlation between payrolls and the employment component of ISM.  The rebound in the employment component suggests payrolls could fall by as little as -500k.  

Source: Bloomberg

ADP - Even though the ADP report has not been a good leading indicator in terms of the absolute number of job losses, it is fairly accurate directionally and therefore the rebound in April confirms our belief that the pace of job losses declined.  

Source: Bloomberg

Weekly Jobless Claims have also peaked which is a criteria for signaling an end to the recession.

Source: Bloomberg

Leading Indicators Show Rebound in April

It has been a long time since leading indicators have stacked themselves up in such a positive way. The Employment Component of Service Sector ISM, perhaps the most important of our leading indicators, showed a large rebound this month. Employment in non-manufacturing jumped from 32.3 to 37.0. Similarly, the Employment Component of Manufacturing Sector ISM helped spread the optimism across all sectors of the economy, showing an increase of 6.3 points to 34.4. It is important to note that these numbers are still in a contractionary state, but improvement is very clear. The ADP Report of Private Sector Employment came off of last month’s devastating -742K tally in job losses, to -491K.  Furthermore, Challenger Layoffs sank to the lowest level since September while the Monster.com index which measures online job ads increased in April.  The good news continues in Consumer Confidence. The University of Michigan reported that confidence has reached the highest levels in eight months, jumping by the most in two years while the Conference Board’s index saw the biggest rise since 2005. The only negative figure is the Continuing Claims, which are steadily increasing but that should continue until job losses stop completely.  The four week moving average is a more reliable indicator for the trend in the labor market and therefore it is encouraging to see claims fall to a 3 month low in the week ending May 2.

However with that in mind, the unemployment rate is still expected to climb to a 25 year high of 8.9 percent.  Originally most people had expected unemployment in the U.S. to exceed 10 percent by the end of the year, but recent improvements in U.S. economic data has encouraged Fed Chairman Bernanke to say that 10 percent unemployment may be avoided.  

What Is the Market Expecting?

Here are the forecasts for April Non-Farm Payrolls:

Fade the Knee-Jerk Reaction

Although we believe that a stronger non-farm payrolls report will help to extend the rally in the EUR/USD and USD/JPY, non-farm payrolls is notorious for being a volatile piece of data to trade.  Revisions and expectations will impact how the various currencies react and bear in mind that the first reaction to the non-farm payrolls report will most likely not be the real one that lasts for the rest of the trading day. The last 4 times non-farm payrolls were released, the knee jerk reaction was quickly erased.  In each of these cases over the months of April, March, February, and January, the actual number came in at or slightly worse than expectations. The pattern that has emerged has shown an immediate knee-jerk reaction, only to be reversed into an all-day trend (see charts below). Even though the direction associated with these instances has not always been the same, we can see that the immediate reaction is not sustained, and eventually reversed into a more substantial move.

EUR/USD intraday move following payrolls report in April

EUR/USD moves in prior months

Comments (4)

Garyfisher

May 08, 2009 at 11:20 AM ET

Hello Kathy, Good comments you have here. I like the report data being presented in this way, it really helps in understanding the economics data and its mkt direction. Please continue to report like this way for others economics data, Great work! Thank you.

klien

May 08, 2009 at 02:17 PM ET

Glad you like it Gary. Are you the Gary Fisher that I used to work with?

Garyfisher

May 09, 2009 at 04:55 AM ET

Kathy, nope, I am a trader from SG, attended your seminar last month. :)

Balanced

May 09, 2009 at 03:31 PM ET

Kathy,

Great analysis on the NFP and the direction of the EUR/USD. Very astute straight forward reassoning on the numbers being lower than expected. Albeit, if this was going to weaken the dollar what was the purpose of buying the U/J - would you not want to posture a sell on this pair with a weaker Greenback? Hindsight is always 20/20 but I am curious about your reasoning?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.