ADP Jobs Preview: Three reasons for an upside surprise, which may further lift USD, melt Gold

Correlation is not something to care about – investors are not scientists looking for rigorous proof that an economic indicator is a leading indicator. ADP's private sector jobs report provides a shaky hint toward the official Nonfarm Payrolls (NFP) publication. Nevertheless, it has an impact – providing traders an opportunity.

Here is a preview of the ADP Employment Change for September, published on Wednesday at 12:15 GMT.

There are three reasons to expect an upside surprise, extending the trend of US Dollar strength while pressuring Gold and stocks. 

1) More beats than misses

After several months of robust job gains, America's largest payroll provider reported an increase of only 177,000 positions in August. Nevertheless, such bumps in the road are common, followed by a return to robust beats.

Here are the figures in the past few months:

ADP Employment Change (in thousands).. Source: FXStreet

ADP's jobs report exceeded estimates in two-thirds of the releases in the past 12 months, with substantial surprises in April, May, June and July. August's small miss of 18,000 jobs looks like the outlier. 

2) US jobless claims point lower

Better-than-expected labor data comes from weekly Unemployment Claims as well. These have come out below estimates and close to the historic lows under 200,000 in recent weeks. The data beat estimates in the past seven weeks.

ADP's report, like the Nonfarm Payrolls, is compiled in the week including the 12th of the month. In this case, it is the data released in the week ending on September 15, which was the bottom of the current cycle so far with merely 202,000 jobless claims:

US Unemployment Claims. Source: FXStreet

3) Soft data points higher as well

The ISM Manufacturing Purchasing Managers' Index (PMI) came out on Monday, beating estimates with a score of 49, better than the 47.7 expected for September. More importantly, in the context of the ADP jobs report, the Employment component jumped from 48.5 to 51.2, surpassing the 50-point threshold which separates contraction from expansion.

While the manufacturing sector is small in comparison to the services one, the stabilization of hiring in the industry is a positive sign, adding to the narrative that the weakest part of the economy is on a stronger footing. 

For the ADP report, economists expect  an increase of only 160,000 private-sector jobs in September, below the 177,000 reported in August. These estimates look modest when the data above is taken into account. 

An upside surprise would give further backwind to the US Dollar, which is supported by other positive figures, rising yields – partially a result of increased bond issuance – and hawkish comments by Federal Reserve (Fed) officials. 

Gold suffers from higher yields, while stock market investors are wary of higher yields more than they are cheered by a stronger economy. 

Final thoughts

The ADP's jobs report carries low expectations, and a series of upbeat figures imply a good chance of an upside surprise, supporting the US Dollar. How long would such a Greenback rally go? The next data point is the ISM Services PMI, less than two hours after ADP. Markets may partially reverse any short-term move – gearing up for the next release.