Research Note: December US Employment Report

On Friday, January 6, at 0830ET/1330GMT, the US Dept. of Labor will release December 2011 jobs statistics. The consensus expectation for the change in non-farm payrolls (NFP) is +155K (prior +120K/range of estimates +80/+220K); the consensus for the change in private payrolls is +175K (prior +140K/range +130K/+230K); and the unemployment rate is expected to rise to 8.7% from 8.6% (range 8.5%/8.8%), according to Bloomberg surveys of economists. The usual annual revisions for the prior 5 years of employment data will also be released. While today’s Dec. ADP National Employment Report showed a significant surge in private job creation (+325K vs. exp. +178K and prior +204K), we think seasonal adjustment factors caused the overshoot and that the pace of job creation has not increased materially. Other interim indicators (lower weekly jobless claims, slightly higher ISM employment indexes) suggest a more modest pick-up in hiring, but an increase nonetheless. We expect NFP at +150K, private payrolls at +170K and the unemployment rate to hold steady at 8.6%. We think the risks are for an above consensus reading owing to seasonal factors, but would be leery of too much optimism following such a result. More generally, a reasonably upbeat US jobs report (i.e. around consensus) would simply reinforce the notion that the US recovery is enduring modestly, which we think is already priced-in to many markets. This suggests to us that market focus would quickly return to the greater stresses emanating from Europe and could see risk sentiment ultimately sour further.

Market Strategy: Overall, European banking/debt concerns are overshadowing economic data and risk aversion is running high into Friday’s release, and this has seen the USD strengthen sharply ahead of the report. Jobs data around/better than consensus could see risk sentiment stabilize somewhat, and we think this could provide scope for the USD to retreat and risk currencies, especially AUD, CAD, and NZD, could rebound. We also think the JPY-crosses might be a better way to exploit a recovery in risk appetite. In particular, we would note the daily Kijun lines in AUD/JPY at 78.75 and in NZD/JPY 59.69 as potential long entry points. USD/JPY looks to us to have solid demand at 76.50 and we would look to use dips near there also as an opportunity to get long. EUR/USD has taken a beating in recent days and is currently (last 1.2787) below the lower daily Bollinger Band (1.2803) or down more than 2 standard deviations, suggesting some statistical potential for a rebound, in our view. We think a recovery above 1.2850/60 would signal potential for a short-squeeze higher. Of course, it will all come down to the news/data flow out of Europe, and if sentiment there remains desperate, we would look to use any post-release bounce in risk as an opportunity to get short risk currencies. As always, we will take note of the immediate post-release price reaction, and if prices reverse back through pre-release levels, we would interpret that as a reversal/failure and go with the subsequent move.