City Index predicts higher than expected NFP

On Friday 7^th July the US Bureau of Labor Statistics is scheduled to release the June jobs report at 1330 BST. The market is expecting a reading of 177k, which is above the 138k from May. At City Index our proprietary NFP model is predicting a larger than consensus reading of 217k.

When your estimate is significantly bigger than consensus it can make you nervous, however, consensus estimates are merely the median of 83 estimates that are surveyed by data provider Bloomberg. When you dig a bit deeper into these estimates you realise that perhaps we are not that far away from some Wall Street estimates. Our 217k reading is similar to Deutsche Bank and Standard Chartered, whose economists we admire, thus we are willing to stick with our estimate.

Why is our estimate larger than consensus?

We put this down to a few things, firstly, the better reading of the ISM manufacturing employment component for June, which rose to its highest level since March. Also, the decent decline in Challenger job cuts, which fell by 19.3% YoY in June, suggesting that plenty of jobs may have been created in the last month.

Are banks too downbeat on the US economy?

Another factor to consider is that some banking models may have factored in a weakening in the general outlook for US economic data, after a string of economic data misses for the US in recent weeks. We have not factored this into our model, which may explain our larger NFP estimate. We argue that some of these estimates may be too downbeat and are underestimating the potential for a rebound in payrolls after 3 months’ of weak jobs data.

Looking for the trading opportunity

This is the most important part of the payrolls data, but before you come up with your trading ideas it is important to look at the financial and economic context as we head into Friday’s payrolls release. As we mention above, the US has experienced some recent data misses, also the dollar continued to fall in June, the dollar index lost 2.3% over the course of the month. This is significant, a weaker dollar is good news for exporting industries like the manufacturing sector. Hence, the weakness of the buck could be one reason why the employment component of the manufacturing June ISM rose to its highest level for 3 months, and it may also be one reason, if our estimate is correct, that NFP’s beat consensus on Friday.

In terms of the trading opportunities, we did a very simple correlation analysis to try and find which assets had the strongest correlation to the NFP report. Although this analysis is far from perfect, the monthly correlations since the start of the year are as follows:

• USD/JPY and NFP:  0.77
• USD/GBP and NFP:  -0.63
• USD/EUR and NFP:  -0.26
• S&P and NFP: 0.01

As you can see, the US stock index has no correlation with the NFP report, so stocks may not be worth trading around reports like this. Instead, USD/JPY and GBP/USD have the strongest correlations, which means that these FX pairs tend to move the most over an NFP release.

NFP and FX

• The JPY tends to weaken with the release of the NFP, which could be down to the fact that the yen is a safe haven and once the NFP, a key risk event, is over, regardless of the outcome, the market ditches safe havens.
• Cable is also one to watch, this year the pound has tended to rally vs. the USD on the back of the payrolls release, potentially because the US and UK labour markets are considered fairly similar, so if the US labour market is weakening then this could boost the outlook for the pound.
• Overall, we believe that the NFP report is important for the outlook for the dollar, and if we get a strong reading for June then we could see the dollar rally at the end of this week.