NFP preview: Imbalanced labor market to remain a thorn in the Fed’s side?

Overview

Tomorrow brings another US jobs report, and based on Fed Chairman Jerome Powell’s press conference earlier this week, the US central bank still believes the US jobs market is “out of balance,” with far too few workers relative to the number of job openings. Will this finally be the reading that shows signals the tight labor market is easing?

As the graphic below shows, traders and economists are expecting to learn that the US economy created nearly 200K net new jobs in January, and that the average hourly earnings for workers rose by 0.3% m/m, a development that would keep expectations for future price increases elevated:

Source: StoneX

Are these expectations justified? We dive into the key leading indicators for Friday’s critical jobs report below!

NFP forecast

As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report, but due to the vagaries of the economic calendar, we won’t get access to the ISM Services PMI report until after the NFP report this month:

The ISM Manufacturing PMI Employment component printed at 50.6, roughly in line with last month’s 50.8 reading.
The ADP Employment report came in at 106K net new jobs, well below expectations and last month’s 253K print.
Finally, the 4-week moving average of initial unemployment claims fell to 198K, down from last month’s 214K reading to near historical lows again

As a reminder, the state of the US labor market remains more uncertain and volatile than usual as it emerges from the unprecedented disruption of the COVID pandemic. That said, weighing the data and our internal models, the leading indicators point to a roughly as-expected reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 150K-250K range, albeit with a bigger band of uncertainty than ever given the current global backdrop.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which rose 0.3% m/m last month, will likely be just as important as the headline figure itself.

Potential NFP market reaction

	Wages < 0.2% m/m	Wages 0.2-0.4% m/m	Wages > 0.4% m/m
< 100K jobs	Bearish USD	Neutral USD	Bullish USD
100K-300K jobs	Slightly Bearish USD	Slightly Bullish USD	Bullish USD
> 300K jobs	Neutral USD	Slightly Bullish USD	Strongly Bullish USD

The US dollar index extended its downtrend over the last month to hit its lowest level in more than nine months near 101.00. The move has been relatively controlled, so the world’s reserve currency isn’t necessarily oversold on a short-term basis, but with markets seemingly disregarding Fed Chairman Powell’s hawkish comments, the risk may still be tilted toward a bounce in the greenback if the jobs report beats expectations.

In terms of potential trade setups, readers may want to consider USD/CHF buy opportunities on a strong US jobs report. The pair is currently testing strong previous support in the 0.9100 area, with the daily RSI indicator showing a bullish divergence; a strong fundamental reading on the US economy could provide the spark for the bullish technical setup.

Meanwhile, a weak jobs report could present a buy opportunity in AUD/USD. The Aussie is testing previous resistance in the 0.7135 zone as we go to press, and with inflation still accelerating Down Under, along with the bullish impulse from China’s reopening, a breakout through that resistance level could quickly target the June highs in the upper-0.7200s.

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