Today's Payrolls Number - How Bad Will It Be?

 |  Includes: UDN, UUP
by: Kathy Lien

Non-farm payrolls for the month of June are due for release this morning, but with the Federal Reserve no longer looking to cut interest rates, will the degree of payroll growth actually have meaningful impact on the U.S. dollar?

The NFP number is being released at the exact same time that ECB President Trichet begins his press conference (3 Potential Outcomes to the ECB Meeting), which means that we could see unusual volatility tomorrow morning. The ECB press conference and the NFP report will either neutralize each other or be a toxic combination for the US dollar.

How to trade the Non-Farm Payrolls Release

Non-farm payrolls are being released early this month because of the Independence Day holiday in the US and for that same reason, trading could grind to a halt after 12 noon as US traders take off for the long weekend.

Trading the NFPs is usually very difficult given the inherent volatility of the currency pair but given the 2 big event risks tomorrow – the ECB rate decision and the NFP release, the US dollar could behave very differently against the Japanese Yen and the Euro. USD/JPY will be the best currency to trade the NFP because it will not be diluted by the comments from the ECB. The currency pair has actually been consolidating for the past 3 trading days and is itching for a breakout. The EUR/USD on the other hand could have a knee jerk reaction to the NFP report and then a sharp reversal as traders tune into Trichet’s comments. Don’t be surprised by 100 pip candles in both directions. The press conference begins at 8:30am ET, but by the time Trichet starts talking, it is usually 8:40 to 8:45am.

The market currently expects a bad number, so a negative non-farm payrolls report will not be enough of a surprise. The current forecast calls for 60k jobs to be shaved off US payrolls. If payrolls come any where near -90k, the dollar would collapse against the Euro as the market questions the viability of a 2008 rate hike by the Federal Reserve. If payrolls on the other hand are better than -40k, it suggests that the labor market is bad but not as bad as everyone may have feared, which would be dollar positive.

Also keep an eye on the ECB interest rate decision and the press conference. If Trichet proves to more hawkish by hinting that they have to raise interest rates by more than 25bp this year, then the dollar could fall against the Euro even if NFPs drop by less than expected. If Trichet is noncommittal about future rate hikes beyond, the Euro could suffer.

Non-Farm Payrolls Could Fall by 100k?

Without question, non-farm payrolls are expected to drop for the sixth month in a row, but we believe payrolls could actually fall by as much as 100k. Of the 9 leading indicators for non-farm payrolls that we follow (Service Sector ISM will be released post NFP), 8 point to a sharp increase in job losses. The labor market has deteriorated significantly over the past month as layoffs hit the financial and non-financial sectors. Citigroup previously announced that they were cutting 9000 jobs in April and earlier this month they announced another 6000 layoffs in their investment banking division for a total of more than 13,000 job cuts this year. Goldman Sachs has also announced more layoffs while Starbucks is planning to shed many as 12,000 jobs as they close 600 underperforming stores. The bad news just keeps on coming, making a 100k single month drop not only likely, but inevitable.

Even though it is still being debated whether or not the US economy is currently in a recession, it cannot be argued that we are relatively close to one. Therefore it is important to remember how bad the labor market has deteriorated in past recessions. Over the past 3 decades, the US economy has gone through 3 recessions and in each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. Many people argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices. If this is true, it will be a long time before we see a positive non-farm print. In each of the past 3 recessions, the largest single month job loss was more than 300k.

recessionsClick to enlarge


Of the 79 economists polled by Bloomberg, the most optimistic forecast is by Bank of America who calls for drop of 20k jobs. The most pessimistic is Dresdner Kleinwort who is calling for job loss of -130k. All of the economists surveyed expect a negative print, but the range of estimates is extremely wide which means that there should be a good deal of volatility across the financial markets post NFPs.

Nearly all of the leading indicators for non-farm payrolls point to a weak release. The only argument for stronger job growth is the increase in strike activity which is nominal compared to the sharp rise in layoffs and the large drop in the ADP employment report. With the total number of people filing for unemployment benefits at the highest level since 2004, consumer confidence has hit a 16 year low, telling us that the labor market is in a worst shape than it has been since beginning of the year.

Arguments for Weaker Non-Farm Payrolls

1. ADP Employment Report Falls 79k
2. Index Dips Modestly
3. Challenger Reports 46.8% Increase in Layoffs
4. Consumer Confidence Hits 16 Year Lows
5. Jobless Claims 4 Week Moving Average Increases from 376k to 378.2k
6. Continuing Claims Hit Highest Level since Feb 2004
7. Help Wanted Ads Continue to Fall
8. Employment Component of Manufacturing ISM Plunges

Arguments for Stronger Non-Farm Payrolls

1. Strikes Activity Down by 8.3k

All Boils Down to the Fed and the ECB

The problems in the labor market and the continual rise in food and energy prices will eventually start affecting consumer spending. The impact on the non-farm payrolls number of the US dollar all boils down to what it means for the Federal Reserve. If payrolls drop by more than 100k, like we expect, it could be enough to convince the Fed to remain on hold for the remainder of the year. If payrolls are better than expected, then the labor market is not doing as bad as the layoff announcements suggest, leaving the Fed flexibility to raise interest rates in the third or fourth quarter.

Also, keep an eye on the ECB interest rate decision. If Trichet proves to more hawkish by hinting that they have to raise interest rates by more than 25bp this year, then the dollar could fall against the Euro even if NFPs drop by less than expected. If Trichet is noncommittal about future rate hikes beyond the one expected tomorrow, the Euro could suffer.