Expects Lower NFP On Harsh Winter And Cheap Oil

Market eyes scheduled Non-Farm Payroll report release. Many factors support the expectation for NFP to lower slightly. Can the US Dollar defend its gain, or will it enter correction?

Aside of the central bank announcements parade, this week market eyes scheduled Non Farm Payroll report release. Many factors support the expectation for NFP to lower slightly. Can the US Dollar defend its gain, or will it enter correction?

Non Farm Payroll

Non Farm Payroll is a part of monthly unemployment report released every first Friday by US Bureau of Labor Statistics. The same report also contains data of unemployment rate, wages growth, labor force participation rate, along with other figures related to United States job market. The report is one of the most important economic performance indicator that hold high influence on the US Dollar.

An improved job market marked by rising NFP, decreasing unemployment rate, as well as increases on wages and labor participation. Theoretically, in an ideal state of things, people will then be able to allocate large funds on spending, thus triggered high consumption that will encourage productions and business expansions.

Above: Non Farm Payroll February 2014-January 2015.
Bottom right: Average Hourly Earnings April 2014-January 2015.
Bottom left: Labor Force Participation Rate April 2014-January 2015.

US NFP in the last few months have consistently improved above market expectation. Highest NFP in the past year was reached on November 2014, from which the figures deteriorated till 257,000 in January 2015. In the same period, participation force stagnated. However, at the same time, average hourly earnings rose to 0.5%. The situation depicts stabilized job market. As the Fed chairperson, Janet Yellen, indicated during her testimony in Capitol Hill last week, job market has improved, but there some things that is still left behind.

February NFP Prediction

February NFP figures that will be published later today, is expected to drop slightly compared to the one in January.

Reuters polls expects NFP to register at 240,000 with unemployment also drop slightly from 5.7% to 5.6%. Meanwhile Bloomberg surveys resulted in a wide range prediction with median of 235,000. Sean Callow from Westpac agreed with it, The US Feb non-farm payrolls report is expected to continue to show strength, with market median at 235k. Firing rates are historically low and business surveys have still been pointing to expansion in hiring. Risks are to the downside though given the harsh winter. There may also be some impact from the fall in oil prices and rig count on employment in the industry. The unemployment rate is expected to tick down to 5.6%.

Kathy Lien from BK Asset Management also mentioned the possibility of surprises on the downside on the highly influential US NFP report, based on several other recent reports related to unemployment. Jobless claims have risen to the highest level in 9 months, while ADP and consumer confidence dropped. According to ADP Employment Change yesterday (5/3), businesses in the US only hired 212,000 jobs in February; a positive for growth, but is the lowest in 9 months.

US ADP Employment Change Amerika Serikat March 2014-February 2015

She argued that The only argument for an upside surprise is the rise in the employment component of the ISM non-manufacturing report. The point cannot be easily disregarded as ISM index often correlated with NFP; but with the many arguments supported NFP drop, then the possibility for a slightly lower NFP is more convincing. If we are right, the dollar could finally experience it’s a much needed retracement, wrote Lien, However we certainly do not expect an abysmal NFP number. Payrolls should still rise more than 200,000, but unemployment rate could hold steady and average hourly earnings growth cold slow slightly after the sharp rise last month. In other words, tomorrow’s report won’t eliminate the chance of a rate hike by the Fed this year but it should delay it.

Unemployment is one among several focus points to weigh in Fed rate hike. Consistently improved job market will support Fed rate hike within the year, but weaknesses may grant the Fed reason not to go through with it. It is also need to be noted that after ECB announcement last week, US Dollar has became extremely strong, so weak NFP may prompt profit-taking if market feels the Fed probably will refrain from hiking rates within the year.