US NFPs Expected to Fall by 540,000 - How Will It Impact the US Dollar?
Thursday, 05 February 2009 19:30:16 GMT

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Written by Terri Belkas, Currency Strategist

The US dollar will encounter one of its most market-moving pieces of data on Friday: non-farm payrolls (NFPs). The US dollar index has been consolidating below its January highs, and with job losses anticipated to have reached 540,000 in January, the news could determine whether or not the currency will reverse or break higher.

What is the Market Expecting for January Non-Farm Payrolls?

020509_NFP

1. The ADP private payrolls gauge reported its 12th straight drop in net payrolls, amounting to 522,000
2. Initial jobless claims hit a fresh 26-year high, while continuing claims have steadily risen to all-time highs of 4.788 million.
3. Challenger Job Cuts surged for the 11th consecutive month at a rate of 222.4% in January from a year ago.
4. ISM Manufacturing employment gauge continued to hold near its 26-year lows.
5. ISM Non-Manufacturing index shows employment conditions near worst levels since at least 1997.
6. Conference Board’s consumer sentiment survey hit the lowest levels since recordkeeping began in 1967.

Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the thirteenth straight month in January. At the time of writing, Bloomberg News was calling for NFPs to plunge by 540,000, leaving 2009 to start as 2008 left off: negative. Looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 400,000 and 750,000, but based on leading indicators like Challenger job cuts and the ISM employment indices, we think there’s potential for payrolls to fall by 450,000 - 550,000 in January. Meanwhile, something that is starting to garner even more attention is the unemployment rate, which is projected to hit 7.5 percent, the highest since September 1992.

The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 7.2 percent in December 2008 while personal consumption has slowed from 1 percent in Q4 2007 down to -3.5 percent in Q4 2008.

How Will the US Dollar React?

In preparation for trading this top event risk, we need to put it into the context of speculation and consider the impact this employment gauge could have in altering expectations for growth in the US compared to its global counterparts. In gauging the market’s forecast for this event, there is little doubt that the official projection is already fully discounted. The more important factor, though, is that recent price action shows that fundamental US data does not tend to have a logical impact on the currency. Indeed, with risk trends in the driver’s seat, traders must consider the impact of NFPs on risk appetite. Indeed, if we see that NFPs fall more than expected and the unemployment rate climbs above 7.5 percent, the news could trigger losses in risky assets like stocks, trigger flight-to-safety, and thus, boost the US dollar against currencies like the euro. On the flip side, if job losses and the unemployment rate don’t climb quite as much as anticipated, the news could spark enough optimism to boost demand for stocks and forex carry trades, and subsequently lead the greenback lower.

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U.S. Key Economic Indicators









Auto and Truck Sales
# Importance (A-F): This release merits a C-.
# Source: Individual auto manufacturers, seasonal factors by the Commerce Department.
# Release Time: Varies by auto maker from the first business day to the third business day of the month (data for month prior).
In Brief

Auto and Truck Sales measure the monthly sales of all domestically produced vehicles. They are considered an important indicator of consumer demand, accounting for roughly 25% of total retail sales. Demand for big ticket items such as autos and trucks tends to be interest rate sensitive, making the motor vehicle sector a leading indicator of business cycles.

Each auto maker reports sales individually. The reports are typically released over the course of the first three business days of the month. Using the individual reports, a total annual sales pace can be calculated after applying Commerce Department seasonal factors. It is this annual sales pace that the market refers to when discussing auto and truck sales for the month.
In Depth

Vehicle sales figures rarely grab the attention of the market probably for two reasons. First, though the specifics of the data are not terribly difficult to understand, their implications are a little hard to trace. Second, unlike many economic releases, vehicle sales are not released all at once and at the same time every month. This makes it difficult for the market to quickly interpret what the numbers mean for the overall consumption picture and to react accordingly.

This is what happens in terms of vehicle sales during the course of any given month:

1. The individual vehicle manufacturers report their sales results during the first three or four days of the month.
2. A day after the last manufacturer reports the Bureau of Economic Analysis releases its estimate of unit auto sales.
3. About a week after that the BEA releases its estimate of unit truck sales.
4. The Census Bureau releases its retail sales report, including a measure of sales at automotive dealers, usually around the 13th of the month.
5. Roughly two weeks after that the BEA releases its personal income and outlays release, including a measure of spending on motor vehicles and parts.

Each item in this list warrants a more detailed discussion.

Manufacturers
Most vehicle manufacturers usually always report sales results on the first business day of the month; Ford does not report until the third business day. As these individual results trickle out over the news wires throughout the day, diligent economists and market analysts are busy calculating running totals and applying seasonal factors to them--the BEA supplies factors for the coming six months in advance--in order to come up with approximations for auto and truck sales rates. These figures are some of the first hard spending data for any given month; comparing these derived rates to those from months and years prior is a big help when it comes to formulating a consumption forecast for the month.

Unit Sales
Once economists and analysts have translated individual sales results into annual rates, they turn to the BEA to provide "official" unit sales rates. Unfortunately, though the BEA is using the same seasonal factors as the rest of us, more often than not it produces unit rates that are modestly different than the ones that market previously had in mind. Thankfully, however, these differences usually pop up in the individual sales categories--domestic car sales, import car sales, domestic truck sales, and import truck sales--but wash out when all the vehicle types are aggregated.

Retail Sales
With unit sales rates in hand we can proceed to forecast the auto sales contribution to the retail sales figure. And this link is important. In fact, autos often prove to be such a significant swing factor that retail sales are scrutinised on both a total and an excluding-autos basis. It is also worth remembering that the auto term in the retail report is notoriously difficult to estimate; it is not at all rare to see it decline (increase) during a month when unit auto sales rise (fall). Still, by the time the retail sales report rolls around, a few other preliminary spending gauges can be used in conjunction with the unit auto data to get a pretty good read on whether retail consumption rose or fell for the month.

Personal Consumption Expenditure
With unit sales rates and retail auto spending data in hand analysts can hone their estimates for the auto category in the personal consumption release. Many analysts place relatively more emphasis on the retail auto figures to sharpen their PCE estimates, but the unit auto numbers typically have better predictive power for that series. Besides, it is not commonly known that the BEA does not rely at all on the the retail sales data to produce its consumption estimates. Thus, as an important component of the monthly consumption figures that go directly into the quarterly GDP calculation, the PCE auto data are most important to economic forecasters.

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