NFP Preview: Americans lost jobs?

After ADP employment data showed a shock rise in unemployment in January, some are wondering if today's non-farm payrolls will come in negative. How might markets react?

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The markets are a little shaken

Generally, the ADP isn't seen as a reliable predictor of NFP. But the size of the miss certainly raised eyebrows and opened some questions. January ADP came in -301K compared to the +200K projected. This marked the most significant drop since April 2020, when covid led employers to cut thousands of jobs. And the prior month was revised lower. Ouch. It seems the fallout from the new variant alongside government mandates are doing a good job taking jobs away.

In what could foreshadow the market reaction if NFP substantially disappoints, treasuries slipped and supported the stock market. This is related to expectations about what the Fed will do next. So far, the market is pricing in 5 rate hikes for the rest of the year. But, given the Fed's dual mandate, if jobs numbers disappoint, it could mean the Fed might have to pare back its planned hikes in 2022.

Mitigating factors

Analysts quickly pointed out that the ADP's survey period included the most critical part of the latest omicron pandemic. Since then, covid cases have dropped dramatically, with most analysts agreeing this newest wave will be shorter and sharper.

The impact of the virus might be seen as a transitory effect, so the market reaction could depend on how much investors blame the virus for the results. If jobs numbers come in better than expected, it would likely cement at least the March hike. Even if the jobs numbers are slightly off estimates, the weakness could easily be ignored at least by the Fed. A substantially negative print (-300K or worse) might be needed to bring about a sustained dollar selloff.

How much further?

To date, it's estimated that the US is still 3.5 million jobs short of completing a full recovery. The recovery remains uneven, with some states already having recovered their pre covid levels, while others are still far off. NFP would have to average over 500K for the rest of the year to return to pre-covid levels. In any case, a notably disappointing figure would likely not be viewed as ‘temporary’.

DXY at a crossroads

The rise of the dollar index has been eye-watering since its 94.65 low as it soared nearly 3% in a matter of days. It then dropped half that on an evening star pattern right at the top, and it trades in the middle of that 3% range. The 50-day average is the barrier to a rebound or more extended pullback.

Good numbers will justify the Fed's hawkish narrative and could push the index back to its 1.5-year high above 97.5 in the near term. Soft numbers could encourage a deeper drop underneath the rising trendline, which would confirm a bearish trend reversal.

Source: Spreadex Trading Platform

Key Takeaways

Although the ADP came out largely negative, this does not mean it will transpire into the NFP figures. Even if the numbers come out worse than expected on the back of omicron, they will have to show a substantial contraction to move the Fed off its path.