width=229Release: US Non-Farm Payroll Change (Mar)
Consensus Forecast: 209K
Previous:
227K

Release: Unemployment Rate
Consensus Forecast: 8.3%
Previous : 8.3%

Date/Time: 04/06/12 8:30AM EDT (12:30 GMT, 13:30 BST)

Will Fed Liquidity Fears Trump A Positive Labor Market Report?

The non-farm payroll report for March will be an important indication of how the market balances two key factors. If we have a report that comes in as expected - with more than 200K jobs created in the month - it shows that the momentum in the US economy continues on pace.

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A figure than hits the consensus forecast, or is better than expected report, is a positive for US growth as well as for global growth, and should usually be interpreted as a risk on sentiment/fundamental factor.

However, an improving labor market, also likely undercuts further the case for more quantitative easing from the Fed - something the market is very sensitive to after the FOMC meeting Minutes showed a less dovish Fed than expected earlier in the week.

Less chance of stimulus from the central bank is a risk off factor for sentiment. Therefore while it's counter-intuitive a better jobs report might actually undermine sentiment and therefore weaken equities and commodities in the near-term. Other factors that play into a further correction would be concerns around European sovereign debt crisis and worries about slowing Chinese economy.

For more on this theme of a possible equity correction see: USD - Expecting Stronger Dollar As Equities Set to Pull Back From 2Q Rally

We also have to consider that many countries will be celebrating the Good Friday holiday therefore liquidity in the Forex market will be lower than usual which can either increase volatility as few market players able to push around price, or lower volatility as there are less traders at their desks putting in orders. data from I wonder wait till early part of next week to fully gauge the impact on financial markets.

Leading Labor Market Gauges Bolster View That NFP Wont Surprise to Downside

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Jobless claims continue to show a downward trend, improving on the levels seen in January and February. However, we are unable to move below the 350K level which would signal a significant pickup in job growth,  the range seen in January February terms of NFP.

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The ADP employment change for the month of March continues to show private sector hiring continuing on pace, with the reading of 209K March.

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With the consensus forecast coming into the week around 200 K for NFP that would imply a decline in government jobs of around 9K. the pace of government layoffs has slowed in the last three months (-11K in Dec, -1K in Jan, and -6K in Feb) an appropriate estimation.

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Looking at the ISM manufacturing and services indexes, focusing on the employment sub-gauges we see that in both sectors the employment indexes improved from February, which also bodes well for the upcoming NFP report.

Therefore all in all we could anticipate not only that the economy meets expectations, but there is a chance that we surprise to the upside. The bias for it those two scenarios outweigh a negative surprise based on these leading indicators.

Looking for USD Strength

With the sentiment factors outlined at the beginning of the article, and leading indicators suggesting another good print from NFP, I'll stick to the analysis that the USD should strength in the aftermath of this report as we move through next week's trading and can help set the tone for a stronger USD during the rest of April.

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We would therefore be monitoring key resistance in the dollar index which comes in around 80.75. If the index manages to push above that level we would then target 82.0 which would give the USD the chance to extend recent gains versus key rivals. This would also need to be coincident with softening equities and commodities despite the improved outlook in the US labor market.

For the impact a stronger USD can have on EUR/USD see: EUR - Can Concerns Around Spain and Italy Derail the Euro in 2Q?

...But Falling US Yields Might Be A USD Negative

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Another key markets monitor will be the US treasuries, which in a risk aversion environment will see yields falling and undercut demand from foreign investors looking for better yields. That could be one negative factor against USD strength. At the same time if risk aversion is extremely heavy then safe haven flows towards Treasuries can still help the US dollar. However, in one more scenario if a positive US economy is coupled with some easing of concerns in Europe and China, that can help yields rise and bond prices to fall which could create incentive for foreign investors to buy Treasuries, a bit of win-win for the UDS.

The one underlying factor that can undercut UDS strength would be Bernanke signaling more stimulus. Until then, the first part of the 2Q might be dominated by USD strength.

We'll be covering the NFP report live and its impact on USD crosses in our Friday  Market Intelligence Briefing.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to  FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.