US Nonfarm Payrolls Preview: the possibility of a surprise

After Fed Chair Powell’s remarks on Capitol Hill last Tuesday, there is a great deal of anticipation around the impending NFP statistics. Powell effectively stated that if economic data came in far above forecasts, the Fed would raise interest rates by 50 basis points at its next meeting. He emphasised that no decision had been reached, Nonetheless, the possibility for increasing the rate of rise is undeniable, and the market has priced it in.

NFP is the first of two significant macroeconomic data points due before the next Fed meeting. The other is the February flash CPI, which will be released next week. All eyes are now on the employment data, especially after ADP came in above forecasts and JOLTs revealed that there were more available jobs at the end of February than in January.

Analysts agreed that roughly 210K jobs were generated in February, which would be consistent with the last months of 2022. Nonetheless, it is still lower than the 517K figure released in January, which more than exceeded forecasts. The unemployment rate, on the other hand, is predicted to stay stable at a historic low of 3.4%.

There were a few variables that contributed to the surprise job figure last month, and some of them may reoccur this month, while others will not. The return of 74K government workers in California as part of a labour dispute resolution, which helped increase the NFP last time, falls into the latter type.

Last time, the surprise was due to technological changes rather than the actual number of jobs generated. More exactly, it’s not that more people gained employment; it’s that fewer people lost their jobs than usual. Particularly in New England’s more populated locations.

Traditionally, employment losses occur in January as Christmas shopping concludes and company activity decreases due to the weather.

This is accounted for in the BLS adjustment applied while preparing the NFP. But, because January of last year was unusually mild, the ground in the northeast of the nation did not freeze, allowing building and drilling to proceed.

The weather in February was likewise exceptionally mild, although there was a big snow storm that hit the country’s north and west. The combined effect of the two occurrences might wipe out the weather’s influence on job growth.

The adjustment for seasonality was already included in the data last month, so there is unlikely to be another adjustment boost this time around. Moreover, given the big figure in January, the previous month might be revised lower as well, as is common with results that are so far out of the norm.

The US Department of Labor (DOL) reported 211,000 initial unemployment claims in the week ending March 4, according to weekly statistics released on Thursday. This print follows the previous week’s print of 190,000 and was lower than the market forecast of 195,000.

The advance seasonally adjusted insured unemployment rate was 1.2%, and the 4-week moving average was 197,000, an increase of 4,000 from the previous week’s unrevised average, according to the magazine.

“The advance number for seasonally adjusted insured unemployment during the week ending February 25 was 1,718,000, an increase of 69,000 from the previous week’s revised level,” the DOL noted.

US Dollar

US Treasury bond rates are holding their recent rise ahead of the Non-Farm Payrolls report on Friday. Fed Chair Jerome Powell’s recent hawkish remarks to US legislators pushed the yield on the rate-sensitive 2-year UST to a new one-and-a-half decade high (5.085%), as Powell dug down on his higher-for-longer rhetoric.

Powell, although supporting higher rates, maintains that all rate decisions would be based on the totality of facts, giving himself some wriggle space if the prognosis for the US economy deteriorates. Financial markets are now pricing in a 76% chance of a 50 basis point raise at the FOMC meeting later this month, up from roughly 25% last week.

The US Jobs Report on Friday will be widely watched to measure the level of employment in the country. This month’s announcement showed 517k new jobs generated, a significant increase over market estimates, however the number was enhanced by seasonal adjustments. The market anticipates 210k new jobs in February and a 3.4% unemployment rate.

Nonetheless, market estimates for new employment have been exceeded in the previous ten reports, and in some cases by a significant margin.

On July 22, the actual number of 372k was more than 100k higher than the market estimate; on August 22, the actual number of 528k was more than double expectations; and last month’s 517k was 330k more than the market projection. A further strong performance will propel the US currency higher throughout the weekend.

The US dollar is now trading in the centre of a narrow range, maintaining its recent gains. After Chair Powell’s speech, Tuesday’s bullish candle reversed a short-term sell-off and propelled the greenback to a multi-week high.

The next level of resistance, the 200-dma, is around 125 pips away and is likely to hold unless the NFP statistics are significantly better than expected. The CCI indicator at the bottom of the chart indicates that the greenback has returned to overbought territory.