NFP Preview

January Nonfarm Payroll numbers will be announced by the Bureau of Labour Statistics on Friday, February 7, 2014 at 1:30PM GMT. While forecasts for this month’s number range from 175k to 185k, last month’s disappointing figures might have participants prepared for yet another sub-par announcement.

Jobless Claims

Initial Jobless ClaimsContinuing Jobless Claims December’s initial jobless claims seem to have translated into January’s continuing jobless claims, current trend and forecasts appear to be indicating a downward trend for both. Improving jobless claims numbers show us that less people are reverting to unemployment insurance (and in fact more people have stopped claiming it) which might indicate a strengthening labour force and improving employment numbers.

Unemployment Rate & Labour Force Participation Rate

Unemployment RateUnemployment figures have seen a stable decline with recent rapid decreases. January’s rate is estimated to stay the same but if we consider the long term downtrend we see that the US labour market has definitely strengthened.

Labour Force Participation RateUS labour force participation has remained stable within 64% and 63% for quite some time; a recent dip below 63% should soon reverse due to yearly cyclicality but the long term trend is down. The participation rate may not be indicative of NFP but when considering the economy as a whole it is essential to look at in conjunction with the unemployment rate. These two rates will have a major impact on whether the Fed decides to follow through with its tapering.

ADP and ISM

More information regarding ADP and ISM numbers can be found here.

To summarize, long term ADP is increasing and ISM figures suggest slowing growth.

The recent ADP announcement reveals a worse than expected number of 175k which was forecasted to be 203.3k. That being said, ADP has been an inconsistent indicator regarding the NFP report.

NFP Forecast

Given the above information we may have some idea as to where Friday’s numbers will lie but we can never be certain.

NFPTaking a look at historical NFP numbers we may want to consider similar situations from the past. Namely August of 2013 that shows a comparable number and scenario where NFP drastically fell. If we are indeed experiencing a likewise situation I would expect NFP to be at least around forecasted levels.

Simply observing the above chart reveals a high level of variance in the data and inspecting the monthly revisions verifies its inaccuracy. This will not, however, stop speculators from acting on the new information which could be detrimental to the USD.

Fed Tapering Outlook

This Friday’s NFP announcement will be a major hurdle for the USD which will translate to big movements in the major currency pairs and gold. It will also have an influential impact on the Feds decision to follow-through on its tapering policy. We have a number of scenarios to look into to further develop an understanding for the market outlook.

1. Actual NFP is higher than forecasts (above 190k)
2. Actual NFP is within an acceptable range of the forecasts (160k – 190k)
3. Actual NFP is below forecasts (below 160k)

If NFP is above forecasted levels then the Fed will have nothing to worry about and ought to continue tapering. This will strengthen the USD and will be reflected in its currency pairs and gold.

In case of actual NFP laying within an acceptable range (which in my opinion is 160k – 190k) I would expect the Fed to still continue tapering and this would provide similar outcomes as above.

Finally, a sub 160k NFP would not be surprising given previous month’s figures. However, I believe that an extremely lower than expected number (below 120k) would definitely need to be considered before even considering continuing with the taper.

I need to stress the fact that NFP is assessed with a number of other factors which include the unemployment rate and inflation rate; therefore it isn’t the only factor affecting the Feds decision.