Highlights
- NFP Prep: Will the Labor Market Build on Last Month’s Momentum?
- View How Our NFP Forecasts Compare
NFP Prep: Will the Labor Market Build on Last Month’s Momentum?
The December Non-Farm Payroll report will be released tomorrow at 8:30 ET (13:30 GMT), with expectations centered on a headline print of around 241k new jobs. My NFP proprietary model suggests that the NFP report will print in line with these expectations, with leading indicators suggesting a December headline NFP reading of 237k.
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: Bureau of Labor Statistics, FOREX.com
Labor market indicators generally improved this month: the Manufacturing PMI Employment component rose nearly two points to 56.8, ADP rose to its second-highest level in three years at 241k, and initial unemployment claims in the survey week remained in historically strong territory at 289k. The one blemish on the otherwise-strong leading indicators was arguably the most important figure; ISM’s Non-Manufacturing PMI employment fell from 56.7 to 56.0, though this is still above the 12-month average of 54.5. Taken together, the four key leading indicators we track remain still in historically strong territory, and the model still suggests another solid NFP report as a result.
Trading Implications
Over the past few months, we’ve noted that the Fed has pivoted from prioritizing employment to focusing on inflation, especially with the concerning (from an inflationary perspective) drop in oil prices. As a result, there are a broad range of NFP outcomes that could be deemed “acceptable” by the market (see below). Instead of focusing exclusively on the overall quantity of jobs, traders should also monitor changes in the quality of those jobs, keeping an especially close on eye on whether average hourly earnings can build on last month’s 0.4% gain.
Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:
Historically, 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 consider 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 foretell 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. Finally, readers should note that stop loss orders may not necessarily limit losses in fast-moving markets.
