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About GAIN: News & Events |
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RESEARCH NOTE: January US Employment Report (NFP)
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: (Feb 5, 2009) We expect the headline NFP change tomorrow will be a bit better (-520K) than consensus forecasts (-540K), and we concur with the consensus that the unemployment rate will rise from 7.2% to 7.5% (see below for data analysis). Beyond the headline NFP change for January, we are reckoning with a potentially sizeable negative revision to the Dec. NFP report, possibly resulting in a total job loss of more than -700K between the two. However, as bad as such data would be for the near-term outlook, we think markets have essentially priced in such weakness in employment and that any weakness in risky assets (stocks, JPY-crosses, USD/JPY), while likely sharp, will be short-lived. We think the impending passage of the US fiscal stimulus package and the unveiling next week of the US Treasury's bank rescue package v2.0 will bolster sentiment going forward, making risky asset plays attractive. The risk to our outlook is that sentiment is less resilient than we expect and that another wave of risk aversion sweeps over the market.
Trading Strategy: We will look to use JPY-cross weakness as an opportunity to establish long positions for an eventual rebound as market sentiment shrugs off an expectedly weak employment report. Using EUR/JPY as the base trade, we would expect USD/JPY to initially drop quickly on the weak NFP report. We would look to buy USD/JPY on weakness in the 90.30/60 area (currently 91.30). We would stop out below 89.70 and look to take profit between 92.00/50. In EUR/USD, we think the initial reaction will be EUR higher, but for EUR/JPY selling to then send EUR/USD lower. We would look to buy EUR/USD on weakness in the 1.2680/1.2730 area (currently 1.2810). We would stop out below 1.2650 and look to take profit in the 1.2950 area. The component buying levels above equate to buying EUR/JPY between approximately 114.50/115.30; the stop is below 113.50 and the take profit is between 119.40/80.
Please note, our strategy is contrarian in nature and not without significant risks-- EUR/JPY fell approximately 3.5 JPY in the immediate aftermath following the December NFP report on Jan. 9.
Data Analysis: We look for a better than consensus nonfarm payrolls decline of -520K for January while the unemployment rate looks likely to edge up to 7.5% from 7.2% -- in line with the market guesstimate. While continuing jobless claims edged up sharply in the latter half of the month, the survey period average was only about 400K above the prior month levels. This suggests that a decline in NFP of about -400K is the best we can hope for. Steady employment components in both the ISM services and manufacturing surveys suggest the pace of job losses will closely mirror that of December, when payrolls declined -524K. Furthermore, the jobs differential (jobs plentiful minus jobs hard to get) from the Conference Board consumer confidence survey was relatively steady as well, edging up to -33.9 in January from -35.0 the prior month. Thus all of the evidence we have in hand points to a report that will closely resemble the December outcome.
One important thing to keep in mind is likely revisions to the prior months' data. The December number looks especially vulnerable as the difference in continuing jobless claims from the second week to the last is a whopping 240K. This means that there were potentially at least an additional -240K jobs lost in the second half of the month than what was captured by the originally reported -524K NFP number. Forecasting revisions is a risky business and we will not hang our hat on such a drastic mark-down to the December number. However, it is clear that things did worsen as the month wore on - so the risk of substantial downward revision is very real.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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