The weight of recession is a reality that many of the world's largest economies are already living with; but for the currency market, relative health is of greater fundamental significance than any absolute measures of economic health. This is the frame of mind we should be in when approaching the prospect of another five hundred thousand-plus jobs cut from American payrolls last month when speculating the impact the well-known market-moving Non-Farm Payroll (NFP) report could have of the US dollar. And, with the greenback struggling to regain its footing against the euro, British pound and Japanese yen; a hit to growth forecasts of this magnitude could certainly redefine the currency's long-term trend.
What is the Market Expecting for October Non-Farm Payrolls?
Taking a quick look at the official forecast from Bloomberg's survey of economists, we can see that reports of generational lows in consumer confidence and sharp declines in consumption trends have been interpreted as evidence of another massive cut in employment through the end of 2008. The consensus is calling for an additional 523,000 jobs to be shed last month – a mere 10,000 fewer than the preliminary report for the previous period. Picking the consensus apart, we further see that of the 72 estimates, the high water market was a dismal 350,000 cut; while the boldest prediction called for a loss of 750,000 jobs. Clearly this shows that regardless of the exact number of the net decline; the market does not doubt that the economy is in for a sizable jump in unemployment for the period.
While the net change figure will be the most market-moving component of the Bureau of Labor Statistics' report, it is also important to take note of the unemployment rate and earnings growth numbers. The jobless rate is expected to jump another 0.3 percentage points to 7.0 percent – what would be the highest level since June of 1993. This figure will continue to come into greater contrast going forward as President-elect Barack Obama tries to push through a major economic stimulus plan while warning that unemployment could reach double digits if unchecked. Earnings, on the other hand, have been somewhat overlooked until recently. However income is just as vital a component as employment when measuring the potential for consumer spending. At 3.6 percent, the annual outlook for wage growth is still very high – a factor that could keep the economy from a deeper slump or that is simply lagging the turn in growth.
Arguments for Another Sharp Drop In Non-Farm Payrolls
1. The ADP private payrolls gauge reported a record 693,000-person drop in net payrolls.
2. Total jobless claims (aka continuing claims) rose to a new 26-year high of 4.61 million Americans.
3. Challenger Job Cuts surged 275% in December from a year ago.
4. ISM Manufacturing Employment gauge plunges to its lowest level since November of 1982.
5. Consumer sentiment (Conference Board) hits a record low with 42% of respondents signaling jobs 'hard to get.'
Arguments for A More Restrained Drop In Non-Farm Payrolls
1. Initial jobless claims fell 24,000 filings to 467,000, its lowest level since the week ending October 10th.
2. ISM Non-Manufacturing Employment Component sees a notable rebound, though still near record low.
In trying to conclude our own benchmark for Friday's NFPs, we can see that there is ample support for another half-million jobs lost. The report that likely carries the most weight with speculators is the ADP employment gauge, which recently altered its calculation methodology to supposedly better forecast the government's report. After reporting 693,000 jobs cut through December, this indicator is projecting the biggest drop in monthly payrolls since 1949. Additionally, total jobless claims rose to a new 26-year high of 4.61 million Americans, while the Challenger report printed a 275 percent increase in Job cuts year-through-December. The ISM service and manufacturing sector activity reports were similarly offering dour forecasts. The factory indicator's employment component tumbled to a fresh 26-year low while the much larger service sector was still holding near record lows – despite a modest month-over-month improvement.
Preparing For The Dollar's Reaction
In preparation for trading this top event risk, we need to put it into the context of speculation and consider the impact this employment gauge could have in altering expectations for growth in the US compared to its global counterparts. In gauging the market's forecast for this event, there is little doubt that the official projection is already fully discounted. In fact, realistically, the unofficial consensus among market participants is likely weaker than what economists are benchmarking as traders are likely adjusting for the level of surprise in last month's report. With the surprise of a 533,000 cut in November, the actual number was worse than the most pessimistic 470,000 forecast - much less the 335,000 consensus. What's more, we can see from recent price action from the US dollar, that disappointing data is somewhat losing its sway over the currency. This may indicate a greater reaction to a positive surprise, versus a negative one.
For longer-term fundamentals, this single economic indicator could actually redefine the dollar's trend. Over time, we have seen the primary driver for the US dollar shift. A year ago, interest rates were the primary driver for price action. Just a few months ago, general risk appetite has guided the greenback as the currency took on the guise of a key safe haven for the currency market. While risk trends may still tout significant weight, we have seen recently that this is starting to give way to the next concern: gauging where on the recession curve the US economy is relative to its international counterparts. Recently, the UK has been pegged as being in worse shape than the US; and the Euro Zone is seeing its positive forecasts for riding out the global storm deteriorating. However, if we see that more than a million jobs were lost in the United States in the span of only two months, it would certainly push back expectations for the eventual rebound and put the dollar further back on the curve.
The Technical Outlook
The EURUSD is in the middle of a correction, therefore structure is not clear. In fact, the pair is in a correction of a correction. As such, any kneejerk reaction to tomorrow's NFP release will probably be fully retraced within one or two days. An upward spike would face resistance from former support at 1.3823 (today's high is at 1.38). There is short term support in the 1.3600/50 zone. This zone was congestion in late European trading today. A drop below 1.3532 would make it likely that 1.3310 gives way.