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Official expectations remain rather high for the Non-Farm Payrolls. But the figures leading to the release lean lower. If the result is very low, the dollar bears might be disappointed as well. Here are 4 scenarios for the Non-Farm Payrolls.

The past two months were quite good with job gains of around 200K each month. The last report, for March, stood out by finally exceeding expectations (216K instead of 192K) after many months of the result falling short of expectations.

The unemployment rate was even better – it dropped in the past 4 months, more than expected and reached a level of 8.8%. You might be skeptical about this number, and think that it may be a statistical trick, and that many people are just totally out of the job market. Well, these drops in the official rate were accompanied by parallel drops in the “real unemployment rate”, U-6, which takes into account the discouraged people as well.

The tables have turned

After a good first quarter in the job market, many indicators show that April was weaker:

  • Jobless claims shooting up: It first seemed as a one time glitch, but the subsequent figure, pointing to 429K claims, already looks like a bad trend. Jobless claims in the 380K area for quite some time, after ranging between 430K to 500K beforehand. The most recent number, 24 hours before the NFP, is 474K. We’re back in the dark days. The current return to the previous range is very worrying, and poses a risk to the unemployment rate. An unemployment rate above 9% is likely.
  • Services slowdown: The services sector has seen dramatic slowdown, as reflected in the ISM Non-Manufacturing PMI, that dropped to 52.8. An overwhelming majority of the US economy is in this sector. The employment component of this sector doesn’t look good.
  • Manufacturing stall: The PMI for the manufacturing sector is still high, but the employment component is also showing signs of a slowdown.
  • Small gain in private sector: The ADP Non-Farm Payrolls report fell short of expectations with only 179K jobs gained. While there isn’t always a strong correlation between ADP and the private sector part of the official NFP, this is a bad sign as well.
  • Public sector cuts: State and municipal authorities in the US have been forced to make cuts in positions. This has been in previous months as well, and is expected to continue now.

All these factors lead to a lower gain in jobs than the current consensus of 185K. 120K to 140K seems more realistic, with a rise in the unemployment rate as well.

What does this mean for the dollar?

  1. Within consensus: NFP +170K to +200K, unemployment rate 8.7% – 8.9% – dollar makes limited gains. Probability: medium.
  2. Above consensus: NFP +200K or more, unemployment rate 8.6% or less – dollar makes significant gains. Probability: low.
  3. Below consensus, and according to fresh data: NFP 100K – 170K , unemployment rate 9%-9.1% – dollar makes significant falls. This scenario has the highest probability.
  4. Well below expectations: NFP under 100K, unemployment rate 9.2% or higher. In this scenario, that cannot be ruled out given the recent data, currencies will split: the dollar is likely to fall against the safe haven currencies – the Swiss franc and the Japanese yen, but make gains against all the others, especially the euro, pound and the Aussie. Why? If the US weakens too much, it poses a threat to the global economy. This triggers risk aversive trading, where money flows away from more “risky”, high yielding currencies, and flows into the safer ones. This is exactly what happened just now with the services PMI.

In any scenario, it’s important to remember that Non-Farm Payrolls are a special event – lines can be broken temporarily, and the initial reaction to the release isn’t always the trend at the end of the hour and at the end of the day. I recommend reading the 5 notes for Non-Farm Payrolls trading.

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