NFP Prep The fog of war is thicker than usual

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The March Non-Farm Payroll report will be released tomorrow at 8:30 EST (13:30 GMT) with expectations centered on a headline print of 206 after last month’s strong 242k reading.

Unfortunately, due a quirk in the calendar this month, the NFP report will be released before two of the most reliable indicators, the ISM Services and Manufacturing PMI figures. Therefore, the notoriously difficult-to-handicap release will be shrouded in even more uncertainty than usual this time around. That said, the leading indicators that we do have in hand still point to another decent report: during the NFP survey week, initial unemployment claims were essentially unchanged relative to last month at a historically low level (259k), while yesterday's ADP Non-Farm Employment report came out in-line with expectations  at 200k.

Trading Implications

If Fed Chair Janet Yellen's speech earlier this week is to be believed, the Fed has seemingly shifted into an even more dovish (technically "less hawkish") posture of late, so this month's job report would have to be truly spectacular to move the needle on interest rate expectations. As of writing, Fed Funds futures traders are pricing in only a 22% probability of a rate hike in June and only a 57% chance of a rate hike at all this year, according to the CME’s FedWatch tool.

Three possible scenarios for this month’s NFP report, along with the likely market reaction, are shown below:

As always, traders should monitor both the overall quantity of jobs created as well as the quality of those jobs. To that end, the change in average hourly earnings could be just as critical as the headline jobs figure, especially with many FOMC voters looking for signs of inflation on the horizon before raising interest rates. Wages actually contracted 0.1% month-over-month in February's jobs report, so dollar bulls will want to see growth return before declaring the report as strong, regardless of the total number of jobs created.

Historically, USD/JPY has one of the most reliable reactions to payrolls data, so traders with a strong bias on the outcome of the report may want to consider trading that pair.

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