Market Liquidity Thins Prior to NFP, Easter Holiday

The U.S. employment component continues to be the positive outlier in a mostly disappointing series of economic indicators. This week, the ADP nonfarm employment report was released, and it missed expectations by posting 189,000 jobs versus the forecast 227,000. This is the lowest reading for private-sector payrolls since January 2015. The market has been overly sensitive to missed expectations stateside, and while there is not a heavy correlation between the ADP and this Friday’s nonfarm payrolls (NFP) report, the market will decide the fate of the USD after the biggest indicator in forex is published at 8:30 a.m. EDT.

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.

The employment report in the U.S. gives an insight into the economic wellbeing of the nation. The Federal Reserve, 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.


Private Payrolls Data and Manufacturing Shy of Expectations

The ADP private payrolls data was short 36,000 jobs according to economists’ forecasts. Winter weather, lower oil prices, and a strong U.S. dollar are being blamed for a slower pace of hiring by private companies. Out of the newly added 189,000 jobs, the majority of them (108,000) came from small businesses, followed by medium-sized (62,000), with large corporations a distant third at 19,000 new hires. The data illustrates the lopsided nature of American employment today.

The Institute for Supply Management’s purchasing managers’ index (PMI) signaled a continued expansion but at a slower pace than forecast. The PMI registered a 51.5% reading that is a contraction of 1.4 points compared to February’s data. While the good news is that U.S. manufacturing continues to expand, the deceleration rate is cause for concern. The threat of a strong USD will continue to weigh on manufacturing as lost sales will force companies to cut their employee headcounts.

Fed Bullish on U.S. Recovery and Higher Rates
The Fed has indicated that the decision to raise interest rates has been taken, but the timing and subsequent actions will be based on economic data. This data dependency stance has increased uncertainty as every single economic indicator released is analyzed to glean some insight into when the Fed will finally pull the trigger. Federal Reserve Bank of Atlanta  President Dennis Lockhart, a voting member of the Federal Open Market Committee (FOMC), said this week that he is in favor of a June-September rate hike. Latest data releases imply the Fed will wait until September as some dark clouds have obscured the seemingly unstoppable dynamo that was the U.S. economy. Lockhart still prefers employment data. As he stated, they “are more accurate than measures of economic growth, and should be watched closely.”

The headline unemployment rate and number of added jobs have impressed in the past. But the Fed’s data dependency has made market participants dig deeper into the releases to focus on wage growth and other factors that show there is still slack in the U.S. jobs market. Positive growth on wages can give a much needed boost to the USD which is struggling to gain traction after missed expectations, and the overall dovish FOMC statement on March 18. A disappointing NFP report could wreak havoc on the U.S. dollar, further depreciating the currency against all majors and boosting the price of commodities.

The timing of the release on Good Friday will also add uncertainty to the full impact of the release. Low market liquidity is expected as the date is a bank holiday in several countries, which could trigger higher-than-normal volatility. Monday, and in some markets Tuesday, will see a complete reaction to March’s NFP figures.

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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