Pay Attention to Payrolls!

Tomorrow at 1:30 pm GMT, the much-anticipated employment report for December 2010 will be released. Economic gurus are giddily waiting to see if the labor market was stuffed with an additional 140,000 in hiring as they had forecasted to follow the 39,000 gain in November. Because of that, theunemployment rate is expected to come in at 9.7%, down from November's 9.8% reading.

I know you might be saying, "From 39,000 to 140,000?? That's whack!" But wait! If you look at yesterday's ADP employment survey, you might see some logic in all the giddiness. The report showed improving labor conditions in December when it printed 297,000 payrolls during the month while analysts had only predicted an additional 100,000 to the 92,000 jobs we saw in November.

Aside from that, in the third week of December, initial jobless claimsfell by 388,000 and the monthly average was down 414,000!

Challenger, Gray & Christmas also echoed the positive vibes when it reported that companies made the fewest cuts in 2010 since 2000. In a study conducted by the company, the number of layoffs reached a 7-year high in 2009 with 1,288,030 and then fell to 529,973 in 2010. Awesome, eh?

Now let's backtrack a bit and recall what I wrote yesterday. I discussed the latest FOMC meeting minutes, wherein the Fed said that any changes to QE2will depend on how the economy performs in the coming months. So far, the economy seems to be showing signs of improvement in SOME aspects, but the gloomy employment situation continues to be a pain in the neck for the U.S. As far as inflation is concerned, the Fed has succeeded in keeping prices stable. But it just can't seem to do anything about the dire employment conditions.

With that in mind, it'll be particularly interesting to see the latest NFP results since it will probably weigh heavily on the Fed's decision to expand or contract its quantitative easing program.

The ADP employment report suggests the possibility of a large upside surprise in tomorrow's big release. But would a strong rebound in employment be enough for the Fed to cut QE2 short? What if the NFP comes in way below expectations?

Unless we see an extreme upside surprise, I think it will take more than a single month's worth of positive employment data to completely change the Fed's mind about QE2. But it would certainly give Bernanke and his boys something to think about. If the labor market can show a more sustained recovery and economic activity picks up, then maybe, just maybe, we'll see an end to further quantitative easing.

On the other hand, I'm inclined to believe that the Fed will find further reason to stay on track with its QE2 should the latest NFP data disappoint. In fact, I wouldn't even be surprised to hear talks of QE3 if the labor market continues on its downward spiral.

Now I know you're itching to find out what this means for the U.S. dollar, but hold your horses! Let's first take a look at whether the market has been naughty or nice to the Greenback lately, before figuring out how it could behave upon the release of the NFP.

As I mentioned in one of my recent articles, Uncle Sam has been churning out one strong economic report after another over the holidays, and it seems like this impressive streak is set to continue. A quick look at the charts would reveal that the U.S. dollar has been gaining ground lately as risk aversion and falling commodity prices crippled most of the higher-yielding currencies.

Will we see the same behavior if the NFP prints an upbeat figure? Most probably.

You see, there are a bunch of fundamental reasons why traders would rather be on the Greenback's side now. Aside from the promising U.S. data, weaknesses in other parts of the global economy *cough, euro zone, cough* boost the dollar's safe-haven appeal. Besides, if an improving jobs market would convince the Fed to hold back its QE, traders could run to the U.S. dollar like teenage girls flock to a Justin Bieber concert. Make sure you stay tuned for that - the NFP release, not the concert!