The first Non Farm Payrolls (NFP) report of 2012 is crawling into the limelight as investors will be closely watching to see if the recent improvement in US economic data is also reflected in the NFP figures. The latest data will be released on Friday 6 January at 13:30GMT by the US Bureau of Labor Statistics. Why is the NFP report so significant at this time of the year? Because it reveals the number of paid jobs added or lost in the US economy, excluding the farming industry, reflecting the health of the US economic recovery.

US data improved, QE3 expectations start to fade


Since the $600 billion quantitative easing (QE) program ended in June, economic data has shown signs that the US economy is gradually improving. Data showed Weekly Jobless Claims fell for a third week. Figures also revealed an improvement in the housing market after Housing Starts and Existing Home Sales came in better than expected. The Housing market appears to be the US economy’s Achilles heel after the sharp downturn which triggered the financial crisis in 2007. Durable Goods Orders, Personal Income, Business Activity, Industrial Production and Manufacturing PMI in the US also increased more than forecast. US consumers appear to be on a positive note as they have started spending more, with the Consumer Confidence Index also jumping more than expected in December. US economic growth accelerated to 2.5% in the third quarter offering a positive sign for the health of the US economy. Investors’ eyes now turn to the monthly jobs data.

While 2012 is expected to be the most challenging year since 2009, the first Non Farm Payrolls report of the year may influence sentiment in the market. A significant improvement in US December payrolls data could erase expectations for a third round of quantitative easing. But the absence of what is known as QE3 may be a catalyst for a US dollar rally supported by a heightened risk aversion in the market.

At the last interest rate meeting, Bernanke and his colleagues predicted economic activity in the US gathering pace in 2012 which may lead to the Fed softening its dovish tone regarding the monetary policy. The minutes of December’s policy meeting showed that FOMC policymakers believed the economy expanded moderately over the final months and voted to keep the target Fed funds rate near zero, increasing optimism that the Fed will help liquidity in the market. The Fed also decided to start publishing forecasts showing how the committee expects the Fed funds target will move going forward in an effort to improve communication regarding monetary policy. The minutes also showed that the Fed plans to keep reinvesting maturing mortgage-backed securities into agency securities and purchase long-term Treasury bonds.

Economists argue that the annual US Gross Domestic Product in the fourth quarter could exceed 3%, which would make it the strongest number since the second quarter of 2010.


Jobs data


Friday’s Non Farm Payrolls report is expected to show an improvement in the labor sector for a second month with predictions of 150,000 new jobs added into the economy in December. The unemployment rate is expected to rise to 8.7% from 8.6%. With the eurozone debt crisis deteriorating, Greece and Italy having difficulties raising funds, while Italian government bond yields jumping to unsustainable levels, an increase in the number of jobs may reveal that the US economy remains on the path towards a strong recovery.

In the case of the NFP data revealing a close to or significantly above expectations figure, the dollar may find support as this will be an indication of growth and, subsequently, the need for further monetary easing will start to fade. If the NFP report reveals a significantly lower figure than anticipated, we may see the safe haven US dollar slide. In either scenario, a high level of volatility is expected, which may lead to large price movements.



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