NFP Prep A strong reading could make a December rate hike the Fed s base case

The October Non-Farm Payroll report will be released tomorrow at 8:30 EST (13:30 GMT) with expectations centered on a headline print of 179k after last month’s disappointing 142k reading. My model suggests that the report could slightly exceed these expectations,with leading indicators suggesting an October headline NFP reading of 209K.

The model has been historically reliable, showing a correlation coefficient of 0.90 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

Compared to last month, the leading indicators for the non-farm payrolls report have moved in separate directions. On the optimistic side of the ledger, initial jobless claims dropped to a historically low reading of just 259k new unemployed Americans in the NFP survey week, while the ISM Non-Manufacturing PMI employment reading rose nearly a point to 59.2. However, ISM’s Manufacturing employment measure deteriorated almost 3 points to come in at just 47.6 last month, indicating an outright contraction in hiring intentions at industrial companies. Finally, the ADP jobs report dropped from a 200k initial reading last month down to just 182k.

Trading Implications

After last week’s more-hawkish-than-expected statement from the Federal Reserve (not to mention Janet Yellen’s related comments yesterday), traders have definitively put a possible December rate hike back on the table. Accordingly, this jobs report, along with the November NFP release in early December, will be closely watched by both the Fed and traders. For now, it’s difficult to handicap whether a December rate hike is the central bank’s “base case” (meaning that no further economic improvement is necessary) or its “expected case” (meaning that we’ll see a rate increase in December, if the economy evolves as the Fed anticipates), but a strong reading tomorrow could make the question moot regardless. Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:

As always, traders should monitor both the overall quantity of jobs created as well as the quality of those jobs. To that end, the change in average hourly earnings could be just as critical as the headline jobs figure. Last month’s report showed essentially no change in compensation, so dollar bulls will want to see an acceleration back into the 0.2-0.3% m/m growth range for average hourly earnings before waving the “all clear” flag.

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, experienced traders know that the U.S. labor market is notoriously difficult to predict 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.