NFP Preview: 3 Reasons Why Job Growth is Possible

Last updated 1/7/2010 9:44 AM ET (GMT -5) 8 Comments

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Kathy Lien

Director of Currency Research, GFT

For the first time in 23 months, the U.S. economy is expected to create jobs.  As you can imagine, the first month of job growth is a big milestone after almost 2 years of back to back job losses. Therefore we expect to see an unusual amount of volatility following the non-farm payrolls release on Friday since the bar is set high this month. Although it may be hard for most people to believe that companies are actually hiring, here are 3 reasons why job growth is possible: 

#1 - 9 out of 10 Leading Indicators for NFPs Point to an Improvement in Labor Market

Believe it or not 58k jobs were created in the service sector in November due to hiring for business services, education and health care. So this would not be the first month of net hiring in certain parts of the economy. If job growth returns it should also come primarily from the private service sector with possibly a small contribution from government hiring.

Arguments for Better Non-Farm Payrolls:

Arguments for Weaker Non-Farm Payrolls:

Nine out of the ten leading indicators that we typically use to predict non-farm payrolls tell us that the labor market has improved.   The employment components of both manufacturing and service sector ISM increased. However, it is important to note that the headline number suggests that manufacturing is growing much more rapidly than services. For instance, the Manufacturing ISM index has risen more than 23 points since reaching its low, while the Non-Manufacturing index has only gained 13 points. In addition, the services employment component, while improving this month, has contracted for 22 out of the last 23 months. In addition, the Challenger Layoffs report showed firings subside by 72.9%, while ADP reported the fewest job losses since March 2008. Further evidence for a boost in employment can be found in consumer confidence which, judging by the advances in both the Conference Board and University of Michigan indexes, is already responding to the improved jobs outlook. Jobless Claims also continue their descent with Continuing Claims falling to the lowest since February. The only cause for concern is the Monster.com Employment Index which fell to the lowest level since July, indicating a drop off in online job ads. 

Job Growth can occur even if the Employment Component of Service Sector ISM contracts

The following chart indicates that over the past decade, there have been 4 months where non-farm payrolls increased even though the employment component of the service sector ISM report indicated that companies continue to reduce their workforce.  The current situation is most similar to June and November of 2002 when there was positive job growth even as the employment component contracted and ADP remained negative.  However in both cases, job losses continued after the temporary improvement.  This leads us to wonder whether job growth will be temporary this time as well. 

#2 – On Average, Job Growth Returns 2.27 Months After Recession Ends

Historically, it has taken an average of 2.27 months for job growth to return after a recession. The National Bureau of Economic Research will not officially date the end of this recession until months from now, but based upon the GDP data and comments from Fed Chairman Ben Bernanke, the recession ended in September. If we add 3 months to the end of the recession, job growth is expected to return in December. 

#3 – 1980s Déjà Vu

Does anyone feel Déjà vu? The most recent recession is probably closest in severity to the 1980s recession and interestingly enough, the trajectory of the NFP report continues to look eerily similar to that of the 1980s. If this relationship holds, the U.S. economy should return to positive job growth anytime now.

BUT - If Nov Data is Revised Downward, Another Month of Job Losses is Possible!

However the key word is “improvement.” According to the previous non-farm payrolls report, a net of 11k Americans lost their jobs in the month of November. The only reason why some economists are predicting job growth for December is because even a marginal improvement from last month’s reports puts NFPs into positive territory. If there was job growth in December, the dollar should react positively as the brighter outlook for the U.S. economy drives investors back into U.S. dollars, but what if there is a big downward revision to the November data? This risk tomorrow lies with a downward revision to the November report followed by another month of job losses. If the previous report is revised lower by any material amount, we could still see an improvement in the labor market and have payrolls remain negative which would be negative for the dollar against the Japanese Yen. With that in mind, let us take a look at the expectations:

What are the Expectations?

Here are the forecasts for December Non-Farm Payrolls:

Although the consensus forecasts currently calls for zero job losses and job growth in the month of December, individual forecasts by economists range from a low of -100k to a high of 85k.  Of the 75 experts polled by Bloomberg, 53 percent expect a zero to positive NFP report and 47 percent expect continued job losses. This wide spectrum of NFP projections reflects the uncertainty surrounding this month’s NFP report and the potential volatility that it could trigger in the U.S. dollar. The unemployment rate is expected to remain the same with a slightly greater chance of moving below 10 percent.  

In terms of the reaction in the forex market, any job growth with no major downward revisions to the November data should be initially positive for the dollar while continued job losses would be bearish for the dollar. Also, the Non-farm payrolls report is a notoriously volatile piece of news 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 because when the equity market opens, risk flows can affect the dollar. When it comes to trading non-farm payrolls, it usually pays to wait.

Comments (8)

a_kapoor

January 07, 2010 at 12:43 PM ET

Hey kathy,
I have not been keeping a keen look at the markets or the news lately .. but one thing I am wondering about is EUR/CHF. I remember about 2-3 weeks back you saying that SNB would probably intervene ... Do you still think so ? and how long do you think they will wait before the intervention ..

klien

January 07, 2010 at 01:47 PM ET

Yes, I think that as EUR/CHF continues to fall, the risk of intervention by the SNB increases. The last time that the SNB intervened was when EUR/CHF was trading at 1.46 - maybe they are waiting for that level to be tested again

tkircsi

January 07, 2010 at 12:47 PM ET

There could be one more technical reason for NFP being good or better than expected. The bearish flag formation on the EUR/USD daily chart would be accomplished.

NeoFX

January 07, 2010 at 02:47 PM ET

Hello kathy,

first off, your analysis is truly spectacular. I've also read the book. Great job!!

quick question, I'm currently in an open short position in the Aussie/Dollar. How do you think tomorrow's report may affect this specific pair? we've been talking a lot about the Euro zone mainly but I was wondering if I shoud get out now, lock in the little profit I have on it, and then get back in tomorrow after the announcement.

Obviously I want this pair to tank so hoping on some good US news. Any comment? also, at what exact time do these announcements usually come out and how long after does it affect the currency market moves once it does come out.

thanks
Redi

FXDragon

January 08, 2010 at 05:49 AM ET

Im too young for dejavu with 80s. The only Deja Vu i recall was that strip club in East Lansing when i was studying finance at Michgan State:)

alexjbrandt

January 08, 2010 at 07:00 AM ET

Deja Vu eh? hmmm, maybe you were a repeat customer :P lol.

Back to NFP Report, I'm thinking that it'll print better this time (because of all those new temps for holiday shoppers) and then in January they'll all get laid off and it'll print a bit worse.

FXDragon

January 08, 2010 at 08:41 AM ET

Hey that was 10 years ago maan. Before i moved to ny for my first job at Lehman. It turns out it paid off i didnt stay:))

Those girls are probably mothers by now haha

Doobp

January 08, 2010 at 07:45 AM ET

Eur had broken my daily ATR since 11Dec.. Stronger NFP? very possible..

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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.