Non-farm payrolls for the month of March are due out this Friday and judging from our NFP leading indicators, we could be setting up for a sharp rebound in job growth. The current median forecast for payrolls is 133k, but according to the poll by Bloomberg News, the estimates range from 70k to 240k. Equally reputable names are calling for vastly different results. BNP Paribas expects job growth to be very weak (they have the 70k estimate) while Citigroup expects it to be very strong (hence the 240k). After seeing today’s reports, we think that job growth could reach 150k, especially since we are already expecting a rebound after the weather related drop in February. In recent years, forecasting payrolls has been nothing more than an educated guessing game, but this time, enough stars are lining up in favor of strong report that we could actually see one.

Interestingly enough, this upcoming non-farm payrolls release also coincides with Good Friday. TheUS stock markets are closed; the Chicago Mercantile Exchange is also closed except for FX and interest rate products which will trade until 10am, while the Chicago Board of Trade will remain open until 10:15am. The FX spot market on the other hand will be open 24 hours a day and operating as usual. However, with most US traders in other markets already enjoying their long weekend, FX spot traders will have to be particularly careful about thin trading conditions leading to abnormal volatility and the possibility of trading grinding to a halt after 12pm EST. Also, don’t be surprised if we see a follow through move on Monday since many traders may put off establishing new positions until next week.

Examining the NFP Leading Indicators

A Number of Reasons to believe that Job Growth could be Strong….
1. Jobless Claims sink to a 4 week average of 315k in March from 338k in February
2. ADP rises to 106k from 65k
3. Challenger report indicates that layoffs sees biggest drop in 8 months
4. Hudson Employment Index accelerates
5. More seasonal weather in February should bring back construction sector jobs

The last time the 4 week moving average of jobless claims were this lean was back in December 2006 and January 2007, when US companies added 226k and 146k jobs to their payrolls respectively. The improvement from February to March also tells us that at bare minimum, job growth in March should be stronger than the previous month. Frigid temperatures in February caused many construction sector projects to be halted and these projects should have resumed in March. The Challenger, Gray and Christmas group reported a 24 percent drop in layoffs last month. The last time that layoffs fell this much or more was in November, December and January. The average job growth during those 3 months was 189k.

But there are Still Downside Risks
1. Employment component of service sector ISM remains expansionary, but dropped significantly from Feb levels
2. Consumer confidence has pulled back
3. Problems in the subprime sector could have businesses more cautious
4. Employment component of the manufacturing sector ISM dipped into contractionary territory

The only problem that the generally optimistic forecast faces is the possibility that less layoffs does not translate into more hiring. The deterioration in the sub prime lending sector and the housing market as a whole has triggered a peak in the stock market. Corporate profits is also believed to have hit a peak, which would give businesses just cause to wait for more economic stability or signs of growth before hiring aggressively once again. Consumer confidence has already begun to fall, although that is mostly attributed to the rise in oil prices and the fall in stock prices. Either way, there are clear signs that the US economy is slowing. In the manufacturing sector, we are almost sure that we will see the ninth straight month of job losses.

More Details on What are Expected

Here is what the market is currently expecting:
Change in Non-Farm Payrolls: 133k Forecast, 97k Previous
Unemployment Rate: 4.6% Forecast, 4.5% Previous
Change in Manufacturing Payrolls: -10k Forecast, -14k Previous
Average Hourly Earnings: 0.3% Forecast, 0.4% Previous
Average Weekly Hours: 33.8 Forecast, 33.7 Previous

Revisions are Still the Name of the Game

In addition to the headline number, we have come intimately familiar with the need to watch for revisions because revisions become the name of the game. Back in February, the dollar rallied not because the headline number was stronger than the market’s forecast by 3k, but because January payrolls were revised up by 35k. The same thing happened when January payrolls were released. The headline number actually fell short of expectations by 39k, but that was offset by the same 39k upward revision to December payrolls. Friday’s March figures should be no different. We could see a sharp revision to February payrolls, just as we have seen in the past two months.

What does this mean for the US Dollar?

For the US dollar, how non-farm payrolls fares will be extremely important. The EUR/USD has been consolidating for the past 2 weeks while the breakouts in USD/JPY and GBP/USD have seen limited follow through. The market is hesitating and looking for new direction. Recent comments from Federal Reserve President Poole have suggested that the central bank will be holding onto their hawkish bias. However policy officials still need more time to asses whether the problems in the sub prime sector has spilled over into the general economy. In the meantime, high oil prices will keep inflation a concern. This predicament gives the Federal Reserve no choice but to leave interest rates unchanged at its lofty level of 5.25 percent, which will keep carry trades in play for the time being. All the market needs now is a strong payrolls number to indicate that economic growth is chugging along. Once they see that, they should have the confidence to take the dollar higher. If payrolls fall short of expectations and there are no revisions to save it, do not be surprised to hear the market question whether the Fed is doing the right thing by keeping rates steady and not considering a rate cut.

Kathy Lien is the Chief Currency Strategist at FXCM.