US Non Farm Payrolls data - Scenario study

The labor department in the US is scheduled to release its report on the Non-farm payrolls for the month of February. The data is expected to show the economy added 235K, compared to the previous month’s print of 257K, while the unemployment rate is seen falling to 5.6%, from 5.7% in January.

Going into the report, we have had following developments –

• China has set a lower GDP target for 2015 at 7%, down from 7.5% in 2014

• The European Central Bank announced that QE purchases would begin from March 9th.

• ECB revised its GDP forecasts higher. Short-term inflation forecasts revised lower, while long-term inflation expected to inch higher.

The financial markets are positioned as follows –

• The EUR/USD at decade lows, below 1.10 levels, GBP/USD below 1.52

• USD/JPY steady above 120.00

• USD index is up 0.31% at 96.70

• US 10-year yield flat around 2.11%, 2-year yield steady at 0.65%

• Gold trades flat around USD 1196.40/Oz, WTI Crude Oil marginally up at USD 50.84/barrel

• US S&P futures trade flat at 2100.00 levels, while major European equities are trading flat to negative

The US dollar has been bought aggressively throughout the week despite a string of lackluster data. Overall actions in the markets are indicating that investors still believe the June rate hike could be possible.

The ADP report missed market expectation, while Challenger data showed job cuts rising by 20%. Only, the ISM non-manufacturing data showed gains in employment. Hence, there is a high probability that the actual NFP print could be lower than the market expectation of 235K.

However, there always exists a probability that the actual data – blows past expectations; meets expectations, or misses the market expectation. Meanwhile, the unemployment number is likely to get overshadowed by the NFP print. Moreover, the labor force participation is more important that the headline unemployment figure.

Thus, we could see following action post the NFP action

Scenario I – The data prints higher than expectations

Scenario II – The data prints in line with the market expectations

Scenario III – The data fails to meet market expectations

Note:

• Any print above 200K would eventually read as positive. However, a print between 200K-235K is likely to unfold as per scenario 3.

• In case, the NFP prints below 200K, the moves under scenario 3 could be more amplified.

• Sharp upward revision of the prior figures could help trim losses even in case the February NFP fails to meet market expectations.