NFP in the Spotlight before Fed’s Year-End Meeting

The eventful first week of December will close when the U.S. nonfarm payrolls (NFP) report will be published on Friday morning. The USD has been gaining against all major pairs as U.S. data has been positive while there are growing concerns about Europe and Japan. U.S. growth continues to validate a potential Federal Reserve rate hike next year that will widen the rate divergence scenario between central banks as the Fed and Bank of England hike, while the European Central Bank (ECB) and the Bank of Japan keep rates low with added quantitative easing (QE).

Published by the U.S. Bureau of Labor Statistics, the NFP report includes the total number of workers (excluding certain industries) that are added to the U.S. economy on a monthly basis. It is published the first Friday of every month at 8:30 a.m. Eastern Standard Time.

The employment report in the U.S. is the biggest economic indicator in the forex market as it gives an insight into the economic wellbeing of the nation. The Fed, for the last two years, was laser-focused on the monthly employment report and its headline of the unemployment rate. Fed officials now favor a dashboard that segments different employment data. However, the NFP still plays a big part in the direction of the USD and its relationship with all currencies.

ADP Private Payroll Data Shy of Expectations

On Wednesday, the private payroll data compiled by Automatic Data Processing Inc. (ADP) and forecasting firm Moody’s Analytics was released. In November the ADP payroll figures increased by 208,000 but the figure was below a forecast of 223,000 jobs. While it was a weaker number than expected, it marks the sixth straight month this report showed a reading of more than 200,000 jobs being created. ADP’s national employment report does not have a strong correlation with the NFP given the different size of their samples and the sectors each report covers, but during 2014 both showed a strong recovery trend.

Weekly unemployment claims have been one of the softer indicators in an otherwise solid employment picture. They have risen gradually from a low in the first week of November of 278,000, with the highest of the month being the data reported last week of 313,000.

Forecasts Be Damned: NFP Will Reflect Job Market Resiliency

Analysts forecast 231,000 new jobs in November. The October final report was 214,000 jobs, the expectation was of a 235,000 gain. Even below expectations the growth was enough to drive the unemployment rate lower to 5.8%. The fact that the NFP has had nine straight months of more than 200,000 jobs added to the economy, it has eased the missed expectations. The market continues to be optimistic about U.S. employment, which explains the high expectations, and the USD has not been punished as the American recovery continues to be well supported.

Fed Bullish on U.S. Recovery and Higher Rates

This week, Federal Reserve Bank of New York President William Dudley said market expectations about a higher benchmark interest rate are well founded. The former Goldman Sachs economist sees U.S. growth as stable and conditions such as low oil prices being beneficial, as it reduced the price of energy imports. The U.S. economy grew by 4.6% in the second quarter in the year after a harsh winter in the first quarter. The surprise came in the third quarter where growth beat expectations to make clear that it was not a single quarter bounce as gross domestic product data increased by 3.9%. Dudley sees slower growth in 2015, but still around 2.5% to 3%, with a rate hike likely midyear 2015.

USD Gains on Europe’s Divided Opinions

The EUR/USD has been driven by the ECB’s desire to launch stimulus programs to halt European deflation, and the strong U.S. economic data driving the Fed toward a rate hike sometime next year. European data has been comparatively weak, which has made the ECB increase the tone of its rhetoric. But as long as Germany remains unconvinced, there will be no QE in the eurozone. Stateside, the Fed has had the luxury to not have to mention the headwinds impeding Japan and Europe in its latest Federal Open Market Committee statement. The Fed is clearly focusing on its rate-hike timing and how to keep stoking America’s recovery.

Friday’s NFP report is the last major risk event of the year as there is little surprises expected from the FOMC next week. U.S. employment has been strong but critics have pointed out that the growth in jobs has come from part-time work at the expense of more financially rewarding full-time employment. Also of concern, wages have not kept up with the unemployment rate. On the other hand, with low inflation there is little incentive for employers to raise wages as there is still slack in the labor force. The FX market will start winding down with the jobs report, and it will only raise its head next week before taking a well-deserved holiday. Be advised that market liquidity will thin as trading volumes drop after Friday, with traders looking to 2015 and the challenges that await.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza