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How Severe Could Job Losses be and will it Matter?

Last updated 3/4/2010 2:18 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

A recovery is not much of a recovery when there is no job growth and consumer spending.  Friday’s labor market report is not expected to provide any encouragement for supporters of the U.S. recovery because job losses could accelerate.  The improvements in the labor market have been uneven and we expect this trend to continue – the only difference is that this time we have Mr. Frosty to blame.  Several snowstorms have hammered the Northeast, triggering temporary layoffs in weather sensitive construction and transportation industries. Some non-salaried employees may have also been taken off payrolls for not being able to get to work.  Given the possibility of weather related distortions to the report, forex traders may not all that discouraged by a weak number unless job losses exceed 100k.

With an exceptionally wide range of market forecasts, the only thing that we can be assured of is another volatile trading session.  The most pessimistic analyst on the street is calling for 150K job losses of while the most optimistic is forecasting 30k job growth.  Many traders have been appalled that the White House (through Obama’s economic advisor Larry Summers) is attributing a weak labor market to the snowstorms but with the Northeast facing the worst winter in decades, we cannot ignore the fact that weather matters.  It may not explain the entire decline but without a doubt, it will be contributing factor.  The White House is simply preparing the market for what could be a very weak report by telling everyone to look beyond the numbers and to focus on the overall trend.  First, let’s get the facts straight - Larry Summers did not have the report on hand when he made his comment but the East Coast is a highly populated area and the 2 big snowstorms crippled the region for days. With this in mind, the most important question is whether a large increase in job losses will matter because what is taken away in February will probably be added back in March.  Since long dollar positions are at extreme levels against the euro and British pound, we don’t think that the market will completely ignore the report.  Instead, there will probably be a sharp pickup in volatility that will trigger the typically wide two way movement in the dollar that occurs following the NFP release. In other words, the chance of a reversal to the knee jerk price action in the EUR/USD is exceptionally high this month.  

Leading Indicators for Payrolls Tell a Conflicting Story

Every month we take a look at 9 leading indicators to forecast non-farm payrolls and this month there are just as many factors that point to an improvement in the labor market as deterioration.  The big news of the month was that the employment component of Manufacturing ISM continues to skyrocket, this time reaching the highest in five years. Even though the employment component of non-manufacturing ISM is still contracting, it rose to 48.6, the highest level since April 2008. It is typical that manufacturing leads services in the beginning stages of recovery but it will be critical for non-manufacturing industries to play catch up and boost hiring. There was also improvement in the realm of private sector jobs, which, fell by the least amount in two years. According to ADP, weather was not a problem.   The annualized decline in layoffs was also at the lowest levels in 3 years.   This suggests that without the weather factor, the U.S. economy could have returned to job growth last month. Jobless claims and consumer confidence are the only pieces of data that support deterioration in the labor market. Both continuing and 4-week average claims have been stubbornly inching higher and still remain well above where many consider being more normal levels in the index.  In February we also saw a big glut in confidence, perhaps spawning more from global concerns than national ones.  However this morning, jobless claims fell back to pre-storm levels which confirm that weather is to blame.  

Arguments for Better Non-Farm Payrolls:

1.    ADP Reports Private Sector Job Losses Least in Two Years

2.    Employment Component of Service Sector ISM Rises to Highest Level Since April 2008

3.    Employment Component of Manufacturing Sector ISM Reaches 5 Year High

4.    Challenger Layoffs Falls by the Most in 3 Years

5.    Zero Strike Activity

Arguments for Weaker Non-Farm Payrolls:

2.    Continuing Claims Trends Higher

3.    Conference Board Consumer Confidence at Plummets to 11 Month Low

4.    University of Michigan Consumer Confidence Declines Slightly to 73.6

Here are the forecasts for the February Non-Farm Payrolls Report:

How to Trade Non-Farm Payrolls

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.  The following charts show how the knee jerk reaction in the EUR/USD was quickly erased.  Even though the direction associated with these instances has not always been the same, we can see that the immediate reaction is usually 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.

EUR/USD: Intraday move following payrolls report in February:

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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.