NFP Could Confirm Or Deny Yellen's U.S. Economic Expectations

Includes: DBV, ERO, EUO, FXE, UDN, UUP
by: Dean Popplewell

By Alfonso Esparza

The EUR/USD has broken the right range from the past week after the European Central Bank (ECB) published the decision to hold historically low rates. The European benchmark rate will remain 0.25 as deflation fears persist. After ECB President Mario Draghi met the press the overall feeling was that European rates will remain low, even though he reassured markets the central bank will intervene if low inflation continues to threaten growth.

EUR/USD Forex Graph for April 3, 2014
Friday morning will mark the first NFP in the US after a harsh winter in North America. The market participants will be closely watching the release after US Federal Reserve has reinforced employment as an indicator of economic growth. The difference from Ben Bernanke's tenure at the Fed and that of current chair Janet Yellen will be the more granular breakdown of the headline employment numbers.

ADP Non-farm Payrolls was released this week. The private payrolls jumped to 191,000, up from 139,000 a month earlier. While the expectations where higher, the final number came in close. There was also an upward revision to the previous month's number. Carlos Rodriguez, president and chief executive officer of ADP, stated:

The 191,000 US private sector jobs added in March is slightly above the twelve-month average. Hopefully, this could be a sign there is more growth to come.

The ADP is not a perfect indicator for the NFP. Out of the past 40 times only 9 have come within 10% above or below. The ADP used to show larger job numbers than the report published by the US government. This trend has now reversed and it's the official number that leads the private ADP figures. There have been numerous tweaks on the ADP and Moody's methodology that takes into account ADP figures, BLS data and a business cycle indicator from the Philadelphia Fed. The ADP figures have the most weight.

Janet Yellen has introduced a new dashboard to look at the employment recovery. There are nine indicators in that dashboard: Layoffs/discharge rate, NFP, job openings rate, unemployment rate, underemployment rate, quits rate, hires rate, long term unemployment and labor force participation rate. At the moment, only 2 of the 9 indicators have recovered to pre-crisis levels.

The Yellen dashboard justifies the current low rate environment pushed by the Fed. Employment hasn't fully recovered, as the unemployment rate shows only a partial view. Yellen introduced the other indicators to get a full view. The main challenge for the Fed will be to stay ahead of the recovery and not hike rates too soon. The FOMC statement last month was in line with this thinking, but Yellen's comments in the following press conference jolted the market, with an unannounced rate hike schedule. A dovish FOMC statement turned into a somewhat hawkish press conference, as the Fed could be seen raising rates as early as 2015 spring.

Friday morning's release by the Bureau of Labor Statistics will trigger a market reaction either way. The market's expectation has been optimistic. There is a feeling that the effects of a harsh winter have subsided. This could translate into higher job creation. The forecasts range from under 100,000 new jobs with some analyst going so far as predicting a 250,000 gain. With the EUR on the back foot after the ECB decision and Draghi's comment, the USD could gain some ground if the final March number is close to expectations.

A positive NFP reading means not just the headline jobs added and the unemployment rate, but also the other 7 indicators in Yellen's dashboard. Across the dashboard there should be improvements, given the effect the long winter had on the employment market; this would validate the Federal Reserve's decision to taper at this time. A 2015 rate hike probability would increase boosting the dollar versus major pairs.

A negative or below expectations NFP would put pressure on the Federal Reserve. Employment is one of the pillars that have to support the US economic growth and it has not recovered to pre-crisis levels. Decisions such as tapering would have to be reviewed and that would put the 2015 rate hike further back, which can hurt the USD versus majors.