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The ADP report that measures private sector Non-Farm payrolls data in the US has changed its methodology and it first “new style” report will be released on Thursday November 1st at 1215 GMT/ 0815 ET. The new report will be produced by ADP and Moody’s Analytics service.
Why change the methodology?
There are two reasons to change the report: 1, to bring it more in line with the official measure of job creation as measured by the Department of Labor and 2, to boost its muscle in the world of economic data collection by engaging the help of Moody’s, a company that ADP calls one of the most “trusted” names in employment forecasting.
The ADP report has a patchy relationship with the official measure f private sector payrolls collected by the BLS. Over the past 12 months the correlation between the two monthly figures has been a meagre 0.2. This has fallen dramatically since 2010 when the relationship was closer to 0.5. This suggests that the correlation between the ADP and the official private payroll number, although it has never been particularly significant, has deteriorated over the last 12 months.
How does the new methodology work?
1, the new report will increase the number of industries that report their payroll numbers each month from 3 to five. This will now include construction, financial activities, manufacturing, professional and business services, trade, transport and utilities. These five industries constitute 50% of all US non-farm private sector employment.
2, the sample size used to create the report has increased from 344,000 companies to 406,000 and from 21 million employees to 23 million employees – which are 20% of the private sector non-farm workforce.
3, it will also draw on revised historical payroll data collected by the BLS, and the business conditions sub-index of the monthly Philly Fed report, which has a close relationship with official payrolls data and takes account of initial jobless claims.
What does this mean for the FX market?
The ADP’s aim with its new methodology is to bring the ADP report more closely in line with the BLS’s revised numbers. However, the BLS revises its numbers with a lag, thus the ADP report may not align as closely with the unrevised figure released for the same month. For example, the November ADP report may not tally as well with the November BLS report if it is subject to revisions further ahead.
The immediate impact of the ADP change is the large revision to its September figure. It initially reported that 162k jobs had been created by the private sector last month. This has been revised down to 88.2k, which is closer to the 104k reported by the BLS last month.
The September ADP and NFP releases both only had a temporary impact on the market as you can see below. EURUSD tends to be volatile around employment reports, but after the ADP reported that more private sector jobs were created than had been expected the cross moved less than 100 pips. Likewise, the September NFP reading caused EURUSD to jump 50 pips. This cross essentially continued to range-trade for most of September and the employment reports did not have much of a market impact. We believe this is because the payrolls data was neither too hot nor too cold at 114k and thus did not signify any potential change in Fed policy.
But payrolls do have the power to set the tone of FX market after their release. The market expects the ADP report to pick up 135k this month and the BLS NFP number for October to come in at 125k. This is fairly neutral data, and if consensus is correct then we would not expect a large reaction in the markets and for the 1.2880 – 1.3025 range in EURUSD to persist. But a big positive or negative surprise from the ADP and NFP data this week may cause us to break out of this range in the near term., so it’s worth looking out for these data releases.
EURUSD – after September ADP and NFP reports on 3rd Oct and 5th Oct, respectively.
Source: Bloomberg and Forex.com
Only time will tell if the ADP report is more closely aligned with the BLS data. If it is then it would boost the importance of the monthly ADP release for FX traders.
The market reaction from the changes to the ADP report will depend on a couple of things:
1, ADP data surprises. It may take forecasters a while to get their forecasts right due to the new methodology, thus there is an increased chance of positive or negative data surprises, which could move the market going forward.
2, Since the new ADP report will use BLS revisions in its methodology it may take a while for the new ADP report to align more closely with the official NFP release.
Since the Fed has aligned the longevity of QE3 to the labour market, these surveys are even more important and changes to how they are measured should be watched closely by traders.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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