Rumors are flying around everywhere. Traders and investors alike are pondering today’s employment report. Some are looking for 600,000 to even 700,000 jobs to be lost, while others, like Bloomberg’s economists, are forecasting a more conservative 515,000 jobs lost (down from 533,000 the previous month).
So why all of the huge speculation to the upside? Wednesday’s ADP (Automatic Data Processing’s) Non-Farm Employment report….that’s why. Automatic Data Processing provides payroll services to many corporations all over the U.S. So they use the data collected from their customers (the corporations themselves) to derive their overall employment estimations.
This report started being made public back in May of 2006. While its month to month numbers are definitely not reflective of what we see in the government’s release of their NFP numbers, over the course of the year, the ADP’s trend and the government’s NFP’s trend have a correlation of 95. (100 is a perfect correlation while 0 means no correlation at all between the two).
This is why so many people get a “peek” at the potential government numbers by looking to the ADP numbers that come out two days in advance.
ADP was looking for 495,000 jobs to be lost in December. However, the actual number came in as 693,000 jobs being lost for the month. Ouch! The previous month they had reported 476,000 jobs lost. So they were expecting a tick up in the numbers but not the huge jump that they got.
Therefore, this is what “stirred the pot” for traders and investors alike expecting higher numbers out of today’s government released NFP numbers.
Since jobs were lost in about every month that I can recall in 2008, there’s a good chance for the “trend” to continue into December with many more job losses.
The unemployment rate will rise to a 16 year high if what Bloomberg is projecting is right…from a present 6.7% to 7%. Wow! Not good!
Why the NFP report moves both stocks and currencies
So why are NFP numbers so important? Job creation is an important “leading indicator” of consumer spending, which accounts for the majority of overall economic activity in the U.S.
Therefore, if you can figure out the trend of the payrolls, you can get a good feel for whether consumer spending will increase (due to new jobs being created) or consumers tightening the belt due to job losses (like we saw all throughout 2008).
Personally, I feel that if the numbers come in close to the 500k mark, that the markets have already priced that in. However, if we get a number that is well into the 600,000s or even worse, the 700,000s ..then it won’t bode well for the U.S. dollar or U.S. stocks for the trading day.
However, do keep in mind that the stock market cycle does precede the actual recovery of the economy. So when this is coming about…bad news can still come out and stocks still rise. The question remains…are we at that point yet? That’s the million dollar question.
As for the greenback, many other foreign currencies (like the euro and Aussie dollar) should start to look better as they have begun to stabilize and still yield higher interest rates at this point. U.S. Treasuries have “bubbled” which could restrict inflows from abroad into the buck with its ultra-low yields. So while it had a stellar 2008 as a defensive play…it’s luck may be running out for 2009 overall.
So tell me what you think and where you feel things will go with NFP and the unemployment rate.