Pre-NFP data provide mixed signals

January’s estimated change in employment was released on Wednesday, 1st of February, by the ADP. Their latest estimate, known to be a leading indicator of the Non-Farm employment change, came out below expectations at 170,000 jobs pointing to a weaker Non-Farm Payrolls (NFP) reading. ADP’s forecast, which excludes the farming industry and government, reported 95,000 jobs coming from small businesses versus to a negligible 3,000 jobs by large companies. Furthermore, the ADP’s December figure was revised down to 292,000 from 325,000 jobs reported.

On Thursday, 2nd of February, the US Department of Labor released a better than expected Unemployment Claims figure. This item is perceived as much less important as ADP, as it only gauges past weeks employment activity. In any case, the claims recorded a drop to 367,000 from the previous 379,000, and different scenarios have now surfaced regarding the NFP release on Friday, 3rd of February.

The Non-Farm Payrolls print in December presented an addition of 200,000 jobs in employment, after the 100,000 jobs added in November. This was further bolstered by the unemployment rate, which – surprisingly - dropped to 8.5% from a revised 8.7%. The consensus for NFP’s upcoming release centers around 150,000 jobs.

Recent developments

The Federal Reserve, concerned about the elevated jobless rate and high number of unemployed citizens, it announced that it will maintain its benchmark lending rate near zero, up until 2014. This was a change from a previous announcement that it intended no alteration up until mid-2013.

The annualized GDP for the 4th quarter came out at 2.8%, which although less than expected, remains a solid figure. Increased Durable Goods Orders paired with a sturdy ISM Manufacturing PMI reading above 50, are two economic indicators of a strengthening business sentiment. This is of course promising readings for the US labor market that remains fragile.

Third round of quantitative easing

Employment in the world’s leading economy is expected to have expanded by another 145,000 jobs in January. In this case, the current recovery in the US labor market may boost the US dollar as such data will diminish the scope for a third round of quantitative easing. If and as the economic activity accelerates, the Federal Reserve is expected to lessen its dovish tone for monetary policy, and the nation’s central bank may choose to hold back and closely monitor economic developments throughout the coming months as the possibility of a double-dip recession fades away.

On the contrary, if we witness a deceleration in employment in the midst of a challenging world-wide environment, at the same time as fundamental outlook for US remains vague, Fed Chairman Ben Bernanke will keep highlighting the enduring weakness of the real economy. This will leave the door open to expand the central bank’s balance sheet further, and speculation for further quantitative easing will heighten. In this case, the attractiveness of the US dollar will dampen as the Fed’s policy persuades risk-appetite trading.

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