- Euro and Yen likely to move in same direction around NFPs.
- Retail crowd continues to fade recent US Dollar selloff.
- As market volatility rises, it’s a good time to review risk management principles.
It’s the first US labor market report after the Federal Reserve’s December policy rate hike, one which is being viewed with much consternation as global economic and financial market conditions have soured dramatically in the first few weeks of 2016. With US economic data already off to a terrible start to the year – it’s worst since 2009, according to the Citi Economic Surprise Index – markets are very much of the mindset to question the Fed’s intended rate hike path.
The key question today: is US labor market strength strong enough to keep the Fed rate hike optimism afloat? Current expectations for today’s data are only decent, with the Unemployment Rate expected to hold at 5.0%, and the headline jobs figure to come in at +190K after December’s impressive +292K. Likewise, due to base effects, wage growth figures are due to come in at a muted +2.2% y/y.
The market consensus for today’s NFP release seems to be reasonably muted. The two inputs used in the 10-year Nonfarm Payroll Regression Model, ADP Employment Change and the ISM Services Employment sub-index, have both subsided in recent prints. As a result, the regression model is forecasting January Nonfarm Payrolls at +193K. I’ve also included the summary table on the stats.
Chart 1: 10-year Nonfarm Payrolls Regression Model
NFP multiple regression model ADP ISM services 2006 to 2015
Table 1: 10-year NFP Regression Model Statistical Summary
Note: these are publicly available data, and a basic form of analysis is being used, so these findings aren’t necessarily unique.
A disappointing print relative to the strong December figure wouldn’t be all that surprising, particularly in context of the warmer weather in December – the warmest on record in the US – so there may be a payback period over the coming months. Likewise, especially over the past few years, there has been a statistically significant seasonal distortion in the NFP figures depending upon what month they’ve been issued:
Chart 2: 5-year Nonfarm Payroll Seasonality
The simple nature of today’s report – that it’s not a November or December report – may prove to be a significant hurdle to a big number. It seems today that a few things have lined up for the January NFP report to be a bit of a disappointment.
Given recent commentary from Fed officials – if it was the skepticism cast on their December SEP at the January FOMC meeting or more recently by NY Fed President Dudley – the US Dollar desperately needs another big print here in order for future rate expectations to firm up; currently, only zero rate hikes are being priced in next year, per the Fed Futures contract:
Table 2: Fed Funds Futures Contract Implied Probabilities: February 5, 2016
Fed rate hike probabilities WIRP
See the above video for technical considerations in EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CAD, the USDOLLAR Index, and others.
Read more: USDOLLAR Eyes Major Support Ahead of ADP, ISM Services
— Written by Christopher Vecchio, Currency Strategist
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