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October Non-Farm Payrolls Will Determine If the US Dollar Has Bottomed

Thursday, 01 November 2007 18:05:09 GMT  |  Kathy Lien, Chief Strategist

This Friday, we are expecting Non-farm payrolls for the month of October and now more than ever, the degree of payroll growth last month will determine whether the US dollar has hit a bottom.  On Wednesday the Federal Reserve cut interest rates by 25bp in a move that some people believe will be their last.  GDP growth in the third quarter was very impressive, the strongest in over a year and even though the weakening housing market is continuing to push consumer confidence lower, the recent stability in the labor market suggests that the US economy may avoid a material slowdown. 

Despite layoff announcements across the financial and real estate sectors, we have not seen a major drop in monthly payrolls. With many banks having already made the bulk of their write offs, the worst of the credit crunch could be behind us.  Therefore another month of payroll growth in excess of 100k should give dollar bulls the confidence to return especially given the Fed’s reluctance to lower interest rates further.  At this time, the market is looking for a rise of 82k jobs and today’s price action in the dollar indicates that it is already attempting to bottom.  Should job growth be anywhere near 125k, we expect a sharp dollar rally.  If it remains below 90k however, speculation of a December rate cut will return.  The market is still currently pricing in a slightly greater than 50 percent chance of 4.25 percent rates and it will not take much to drive those expectations even higher.  Therefore the fate of the dollar hangs by a wire and that wire could very well be the October non-farm payrolls report (Also See How to Trade October NFP).

What Should Traders Watch For

Last month, four out of the eight indicators that we follow correctly forecasted the stronger payrolls number.  Of those four indicators, three are now calling for a sharp improvement in job growth for the month of October.  The remaining one, which was the employment component of service ISM, will not be released until the Monday.  Therefore we won’t have this usually reliable leading indicator to confirm or deny that payrolls will be greater than 100k.  Instead, this month, we have six reasons supporting stronger job growth and two reasons disputing it.  Of the 86 economists surveyed by Bloomberg, the most optimistic forecast is by Janney Montgomery Scott LLC who expects 117k jobs while the most pessimistic is Stone and McCarthy Research, who expects only 10k job growth.  For the most part, the estimates are fairly low compared to the amount of private sector payroll growth reported by ADP. Therefore any number greater than 110k should be dollar bullish since most economists are not anticipating a blockbuster number.  However there are downside risks as well since jobless claims have ticked higher and companies are continuing to announce layoffs with rumors of Fidelity being the latest.  As usual, also watch for revisions to the September number because it can easily exacerbate or negate the changes to the current month’s headline figure.

Let’s take a look at what the market is expecting tomorrow:

What is the market expecting for October?

Change in Non-Farm Payrolls:                       82k Forecast,        110k Previous

Unemployment Rate:                                        4.7% Forecast,     4.7% Previous

Change in Manufacturing Payrolls:               -15k Forecast,      -18k Previous

Average Hourly Earnings:                                4.0% Forecast,     4.1% Previous

Average Weekly Hours:                                  33.8 Forecast,      33.8 Previous

 

The odds are tilted in favor of a stronger NFP number, but there are solid arguments supporting both stronger and weaker job growth:

Examining the Leading Indicators for Non-Farm Payrolls

Arguments for Stronger Non-Farm Payrolls Growth

• ADP Employment Indicates Increase of 125K in Private Payrolls
• Challenger Reports a 12% Decrease in Layoffs from September, 8.8% From Year Prior
• Hudson Employment Index Climbed 3.7 Points to 100.8
• Monster.com Employment Index Rises 2 Points
• Help Wanted Ads Rise in September
• Employment Component of Manufacturing ISM at Highest Level Since April
• No Strikes in October 

Arguments for Weaker Non-Farm Payrolls Growth

 ·    Consumer Confidence Falls for Fourth Straight Month

·    4 Week Average of Jobless Claims Rise to 327k, the Highest Since April

 

 

As you can see, payrolls can go either way, but with layoffs at the lowest since 1999, newspaper and online job ads rising and private sector payrolls firm, the odds are certainly skewed in favor of a strong release.  The currency market is already banking on that with the US dollar up across the board.  However, traders need to be careful since jobless claims rose to the highest level since April and consumer confidence fell for the fourth month in a row.  If the labor market is really recovering, confidence would not be the weakest in 2 years.  There are still a lot skeptics out there who do not believe that the US economy has already seem its worst and it all boils down to what non-farm payrolls mean for interest rates.  If there is a reason for traders to believe that the Fed will continue to lower interest rates, then the current recovery in the US dollar will turn on a dime.  Nothing is certain until we see payrolls and even then we need to watch how the market reacts to it. 

 

By Kathy Lien, Chief Strategist of DailyFX.com

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