Nonfarm Payrolls Preview: Dollar needs a strong number to keep rallying

The dollar strengthens ahead of the release amid stimulus hopes.
The US is expected to have recovered some 50K jobs’ positions in January.
The immunization campaign progress slowly, but hopes for an economic comeback persist.

Valeria Bednarik FXStreet

The US monthly report for January will be out this Friday. The country is expected to have added 50K new positions in the month, after losing 140K in December. The cold weather brought a sharp increase in coronavirus cases, which in turn led to some restrictive measures in certain areas of the country. The situation receded as the government sped up vaccination, but the daily number of contagions remains high, and immunization slow. On Wednesday, the country reported 113K cases and roughly 4,000 deaths, a sign that they are far from over with the current situation.

The Unemployment Rate is expected to have remained steady at 6.7%. The Labor Force Participation Rate stood at 61.5% in December, while the underemployment rate was at 11.7%.

Slow progress out of the pandemic

The US has lost roughly 22 million jobs between March and April 2020, when the pandemic arrived in America. So far the country has recovered roughly 12 million, although the pace of jobs’ creation has been decreasing sharply as time went by, and as mentioned, the country actually lost positions. The services sector was the most hit by the pandemic and is still the weakest link in the chain.

At this pace is hard to predict when the employment sector will fully recover from the initial hit, but conservative estimates talk about four years. The global immunization campaign is moving quite slow, although, in the US, 35 million doses have been given. Should the world approach head immunity, the time-frame could be reduced.

Leading Indicators provide mixed hints

Data released ahead of the release was mostly encouraging, although there are a few downers. As said, the pandemic situation is the major drag which led to jobs’ losses in December. Additionally, Consumer Confidence remains subdued, with the CB indicator holding near its post-pandemic low and the University of Michigan estimate stuck around 80.

On a positive note, the ISM PMIs showed that sub-employment component improved in January. Still, worth remembering that these indexes are more about business sentiment than actual progress in the economy.

Initial Jobless Claims continue to retreat on a weekly basis but remain above the 800K threshold. As for the ADP survey, the private sector reported that it added 174K new jobs in January, quite a recovery from the previous -78K. Finally, planned job cuts announced by U.S.-based companies rose 3.3%, to 79,552, in January from 77,030 in December, according to the Challenger Job Cuts report.

US jobs report pre-release checklist – Feb 5th, 2021

Previous Non-Farm Payrolls	Negative	The US economy lost 140K jobs in December, way worse than the 71K gain expected, derailing the post-pandemic job market recovery.
Challenger Job Cuts	Neutral	Corporate layoffs in the United States have stabilized just below 80K per month in the last two releases, just a bit over the usual pre-pandemic levels.
Initial Jobless Claims	Neutral	First-time employment claims 4-week average has stabilized above 800K, halting the job recovery despite five of the last seven releases bettering expectations.
Continuing Jobless Claims	Positive	The unemployment-benefit claimants' downtrend is still relentless, falling below 5 million for the first time since COVID-19 halted the economic activity.
ISM Services PMI	Positive	The labor sub-index in the US main service survey rallied in January to 55.2, the highest level since last February.
ISM Manufacturing PMI	Positive	The employment sub-index in the US main manufacturing survey keeps rising, hitting 52.6 in January, the highest level since June 2019.
University of Michigan Consumer Confidence Index	Negative	The UMich consumer sentiment survey has remained stuck around the 80 mark since the pandemic struck, way below pre-covid levels.
Conference Board Consumer Confidence Index	Neutral	The Conference Board Consumer Confidence Index® improved a bit in January from 88.6 to 89.3 but is still below 90, close to the post-covid bottom.
ADP Employment Report	Positive	Private sector employment bounced back in January, back in positive territory as it printed a 174K job gain. It is only the second better-than-expected release in the last seven for this highly correlated to NFP indicator.
JOLTS Job Openings	Positive	Hiring recovered in the last JOLTS release (October), although the lagging nature of this indicator makes it less decisive for evaluating NFP.

Dollar’s possible reaction to different scenarios

The greenback is strengthening ahead of the release, backed by hopes of another stimulus package in the US. An upbeat report could further boost the dollar, regardless of equities’ behaviour, particularly against its European rivals. Among those, the EUR is the weakest, as the Sterling became more interesting after the BOE cooled negative rates’ hopes.

Commodity-linked currencies are more likely to fall against their American rival if Wall Street comes under selling pressure. Higher yields will push USD/JPY up, no matter the outcome of the report.

Author

Valeria Bednarik

FXStreet

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

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