Posted on: 03 May, 2019
The US is set to release the change in the number of people employed during the month of April, in what should be seen as yet another critical piece of information about the US economy.
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The US is set to release the change in the number of people employed during the month of April, in what should be seen as yet another critical piece of information about the US economy. What’s interesting about today’s set of numbers is that after the volatile range observed from Jan to March, primarily due to the US government shutdown, the data should start to normalize again, so whatever number comes out today, should give us a more accurate picture of the state of affairs in the US labor market.
It’s worth noting that the US jobs market has unquestionably reached levels considered to be at full capacity, with little to no slack to account for. It’s not that workers are not in demand by employers, but the real issue, whenever an economy reaches full capacity utilization of its labor force, is to find the qualified employees due to constrained supply, which paradoxically, tends to pose an increase in downside risk in the headline number, today expected at 175-180k.
What this means is, rather than taking at face value the breakdown of the US jobs number and the unemployment rate, the debate has been gradually shifting towards whether or not employers are forced to increase the average hourly wages paid in order to attract the shortage of qualified labor force. Therefore, the reaction in the USD comes as a function of not simply fixated on the breakdown of the change in the labor force, but it must come accompanied with an encouraging pick up in earnings too.
Let’s now deconstruct the event, category by category, before coming up with some conclusions that could help prepare for the volatile event.
As the chart below indicates, the average of 175-180k expected is very much in line with the projections from the last 12 months, where the 200k threshold appears to be the clear psychological ceiling. Looking at the recent historical patterns, a few insights are revealed. The first noticeable development is that the US employment change has broken above the 200k mark 6 times out of the last 12 months, in other words, in 50% of the events, the US NFP not only beat estimates but it also printed a strong number.
In 3 occasions in the last 12 months, the headline number made it into the 300k, in Dec 2018 and Jan 2019 the most recent occurrences. However, not all is rosy on the change of employment front, as in the other 6 months, the data underwhelmed, with last February’s paltry print of just 30k, due to the US government shutdown disruption, weighting. What’s interesting, with the exception of February’s outlier, is that whenever a beat occurs, it far exceeds the misses, which should be an important data point to reflect on.
Even if by the law of averages, if only based on the last 12 months, it suggests that today’s number is going to be the toss of a coin, the magnitude of the beat in the change of employment tends to be far greater, which makes perfect sense as it's no secret that the US economy has been growing at a very steady pace for years now, far outpacing the RoW (rest of the world), which implies the downside risk in the USD is more contained vs the upside potential on a beat, if only based on this category alone.
Looking at seasonals, April tends to be a month that offers no clear insights on the possible outcome, judging by the data sets compiled from the last 5 years, with the number coming above estimates 2 times, below estimates another 2 times while another time came in line with expectations.
What about the average earnings? Can we obtain some insights by analyzing the latest set of numbers? If in the case of the change in employment the number to use as a reference is clearly the 200k handle, when extrapolated to the average earnings growth on a monthly basis, 0.3% is clearly the ceiling to use as a reference. What’s encouraging about the trajectory of the US economy is the fact that in 2 out of the last 4 releases, or 4 out of the last 8, that level was either matched (1 time) or surpassed (in 3 occasions).
What’s a bit more disheartening, is that in the last 3 releases, in 2 of them the average earnings missed estimates by a deviation of 0.2%. Even if we were to remove these 2 months of bad misses out of the equation, the picture remains pretty even with no clear patterns arising when accounting for the numbers from 2018 and these first 3 months. Also, when it comes to the month of April, it’s a rather weak month in terms of seasonals, with 3 misses and 2 in-line prints in the last 5 years.
An important input to consider for today’s wage growth data is the positive rhetoric out of the last Beige Book report, where it was highlighted that “many districts reported that firms have offered perks such as bonuses and expanded benefits packages in order to attract and retain employees.” In my view, this can tilt the risk to the upside for a potential in-line or above consensus read, while it acts as a reassurance that a bad miss like last month should be avoided.
The chart where I will spend the least time is on the unemployment rate, which is expected to remain at historically low levels (50y low to be more precise) with expectations calling for 3.8%. Some economists are expecting a return back to the 3.7% print seen last Sept and Nov of 2018, which if the case, would be the icing on the cake to prop up the USD if the rest of data points agree. However, with the labor market so tight, one could expect a potential marginal increase in the participation rate, which would make the reduction in the employment rate more challenging. On the contrary, the increase in people coming out of the labor force due to retirement is a trend on the increase, which means a lower participation rate is a risk this year based on demographics; if that outweighs new job seekers actively looking for a job, the jobless rate may keep decreasing.
Each US NFP data release tends to be reflected in the EUR/USD chart by a price volatility of about 30 pips on average in the first 15 minutes before a range extension worth over 80 pips on average if the data points show a clear beat or miss, as illustrated in the historical data below, courtesy of FXStreet. One can dive deeper into each individual event and the market response by visiting fasteconomicnews. Simply click at the US NFP event and then select chart.
What’s interesting is that in the last 12 months, a pattern emerges which reinforces the rationale to play this even. From my observations in the EUR/USD chart via www.fasteconomicnews.com , which could well be extrapolated into other USD pairs, since the EUR/USD is a reflection of the DXY (USD index), judging by each price movement immediately after the data release, algos tend to pick up on the headline number first as long as the earnings change doesn’t miss badly by more than 0.1bp deviation. If it’s a beat on expectations in the change of employment without less than a 0.1bp miss in salary growth, the average reaction is for the USD to spike on average 20-30 pip.
However, a follow through continuation is conditioned to the average hourly wages also coming at or above expectations. If the salary inflation underwhelms, the strategy seems to be a reversion back to the origin of the USD demand area. This can also be observed the other way around, if US NFP misses yet the salary inflation doesn’t surprise strongly to the upside by more than 0.1bp deviation from the 0.3% threshold on a m/m, the initial fall in the USD is subject to also a miss in the earnings figure.
See last month’s price activity as an example. A spike in the EUR/USD worth about 20 pips after the US NFP number beat estimates by a narrow margin of 15k but the salary growth stood at just 0.1%, hence, the market took notice of the latter to initiate the first move before fading it.
Trend for the last 12 months in the US NFP: No particular insights obtained.
Outcomes in the last 12 months in the US NFP: Mixed-bag with 6 positive and 6 negatives.
Deviations last 12 months in the US NFP: Risk skewed towards a larger positive deviation.
Seasonals in the last 5 years in the US NFP: No particular insights obtained.
Trend for the last 12 months in the US salary growth: No particular insights obtained.
Outcomes in the last 12 months in the US salary growth: Unclear with an even number of beats and misses.
Deviations last 12 months in the US salary growth: Risk evenly balanced due to the poor deviations in 2019, which has distorted an otherwise encouraging average.
Seasonals in the last 5 years in the US salary growth: Slightly weak month but far from conclusive (3 vs 2).
Based on the most recent historical data gathered, the saying that the US NFP number is a 'lottery' should hold true based on the analysis of data trends in recent times. However, by diving deeper, the risk appears to be skewed towards a potential larger USD move if the US NFP beats expectations vs if it’s a miss. This thesis is conditioned to not having a bad miss beyond 0.1bp negative deviation in the US wage growth m/m. One should consider this week's blowout in the ADP employment report as an event that may create further upside risks in the headline number via the services sector. The jobless rate is the data point that is set to influence the immediate algo-led reaction the least given the clear downtrend established ever since the GFC. However, a reduction towards the 3.7% mark should be, subject to the heavy-weights agreeing, the icing on the cake to reinforce a USD bullish move. The opposite is true if US NFP and/or wage growth misses badly and the US jobless rate surprisingly increases even if marginally.
The momentum on the EUR/USD heading into the event is clearly negative as the micro slope of the 25HMA reflects, which is further underpinned by a bearish structure of lower lows and lower highs, which so far has achieved two drives lower, hence, we are theoretically still missing one. Even the extension of this 2nd drive down doesn't seem to be complete yet, with a 100% proj target of 1.1155 eyed, as long as sellers can muster further momentum through the horizontal support. Should a clear miss in the US employment numbers materialize, a major area of confluence to expect a strong cluster of offers can be found at 1.1220 (ADR limit, resistance line). On the contrary, any major beat in today's number may see sellers looking to exploit the momentum for an ultimate target of 1.1120 or thereabouts where a major confluence is found.
When it comes to the Sterling, the next 100% proj target aligns perfectly with the 1.30 round number, which is always going to be an area rich in liquidity. Any major beat in the US NFP data series and we could even expect the ADR limit at 1.2975-80 to be tested. On the upside, there are up to three levels that will act as resistances around 1.3080, 1.31 and 1.3115-20. Technically, despite an environment of a rather constructive USD across the board, the GBP should still draw significant buying interest on any overstretched move lower as the bullish structure remains firmly in place and far from being negated following the mega move from the lows on Tuesday.
It's been a very choppy affair trading the USD/JPY this week, which, fortunately, may soon be over if there is enough of a stimulant for price activity to beak in either direction. For now, the lines of battles have been clearly defined post US NFP, with 111.65-70 the first resistance to watch (H4 resistance level), ahead of 111.80 (ADR limit) and 111.90 (hourly resistance). To the downside, an area rich in liquidity is going to be between 111.00 and 111.10, where the ADR limit, hourly support, and the round number meet.
Last but not least, the AUD/USD is heading into the US NFP with a strong negative bias, having reached an intraday 100% proj target sub 0.70c a few minutes ago. A beat in the US NFP will have serious technical ramifications in the Aussie from a macro perspective, as the currency is now staring into an abyss below the massive 0.70 round number. This means that technically speaking, there would be a void area to exploit until faced with 0.6960-65, which would be the 200% intraday proj target and ADR limit. On the way up, a miss in the US NFP exposes a retest of resistance at 0.7030-35 (ADR limit), with 0.70 easily taken out one thinks given the proximity at present time.
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