August NFP—Consensus Estimate 60K to 75K Loss in Payroll Jobs

Release time: Friday, September 5, 2008 — 8:30 AM EST!

Nonfarm payroll (NFP) employment continued its downtrend in July with U.S. employers shaving 51,000 jobs, marking the first time since May 2002 that the economy lost jobs for seven consecutive months. The Labor Department also reported last month that the U.S. unemployment rate rose to 5.7 percent—its highest level in more than four years—erasing all job gains made over the last year. Revisions to May and June's payrolls showed a total of 26,000 fewer jobs were lost than previously expected, bringing the number of jobs lost so far in 2008 to 463,000.

On the inflation front, the Commerce Department reported last week that the GDP price index was revised to an annualized 1.2 percent—up from the initial estimate of 1.1 percent—virtually eliminating any claims of recession for spring. The sharp easing in overall price index was technical in nature, caused by a spike in nominal imports cutting into nominal GDP growth. In contrast, the inflation for final sales of domestic purchases was revised up to a strong 4.3 percent, compared to the initial estimate of 4.2 percent.

Several key factors are thought to have influenced the August NFP. They include:

• Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs

• Notable decreases were also seen in retail trade and wholesale trade—each down 17,000 for the latest month

• The decline of 51,000 in payrolls represents a 0.04% drop that is consistent with the recent trend of declines at about a 0.5% annual rate

• Hourly earnings rose by 6 cents, bouncing back to a 0.3% gain over the month

• Average weekly hours slipped to 33.6 hours in July from 33.7 hours in June

For week ending August 23, the Labor Department reported that the advance figure for seasonally adjusted initial claims was 425,000, a decrease of 10,000 from the previous week's revised figure of 435,000. They also reported a four-week moving average of 440,250, a decrease of 6,000 from the previous week's revised average of 446,250.

The July employment report shows that although the labor sector is weaker than many have been expecting, the payroll declines still are not large enough to pull the overall economy into recession. The bottom line is that the economy has been growing much better than expected despite the credit crunch. It is still likely that the economy will slow during the second half, but perhaps not as much as the Fed needs. Look for the Fed to increase rates in January.

What is the NFP report?

Of all the world monthly economic reports, the monthly U.S. Non Farm Report (NFP) is the most highly anticipated and has the most dramatic impact on the currency market.

The report, which is released on the first Friday of each month and states the previous month's numbers, provides detailed industry data on employment, hours and earnings of workers on nonfarm payrolls. These numbers are the best way to gauge the current state of the US market as well as the direction that the economy is heading.

What's more, the employment numbers provided by the report are used by the Fed to shape their interest rate policies. The health of the U.S. economy and interest rates translate to the strength or weakness of the U.S. dollar.

Risk with News Trading

As with all major economic releases, there could be significant price volatility with this announcement. Currency spreads will typically widen just before the release and will remain wide for a few minutes after. If the announcement is a shock to the consensus estimate, the price of the currency pair could gap significantly. For example, the price on the EURUSD trading at 1.2820 - 1.2822 just before release could gap up 60 pips to 1.2880 - 1.2882, without any available prices available between the price of 1.2820 and 1.2882. A Buy Stop placed before the announcement at 1.2830 would turn into a Market Order and would be filled at the prevailing price 1.2882. The same would be true with a Sell Stop.

Approximately four years ago we saw a gap of approximately 200 pips on the GBPUSD on a Non-Farm Payroll announcement. While this is an extreme example, it nevertheless is a possibility with trading during economic announcements. Consequently, plan on the spreads widening and, if you are trading with a Buy or a Sell Stop entry order, do not anticipate being filled at your entry price. You will be filled at the prevailing market price after the release, which could be significantly different from your desired price of your entry order.

Please be advised that due to the volatility of price fluctuations during the news, it is possible to see a delay in execution due to the additional verification necessary for each trade.

I would like to thank you for your continued support and wish you success in your trading.

Best Regards,

Todd B. Crosland
Chairman and President
IBFX