US NFP report expected to bounce back in April

City Index’s NFP forecast model predicts a 181k gain in US non-farm payrolls for April, which is a touch below economist estimates tracked by Bloomberg, that are predicting a gain of 190k. After last month’s large data miss, we will also be looking to see if there is a significant revision to the March NFP figure, where only 98k jobs were created.

Changes to the City Index prop model

Our proprietary model last month was well wide of the mark when it came to predicting the NFP. We had been looking for a reading of 236k, more than double the actual figure. We have since gone back to the drawing board and have changed our model up a little, to, hopefully, make it more accurate. Our model is now a 4-input model with ADP, the 4-week moving average of initial jobless claims, the employment component of the Non-Manufacturing ISM report and a new addition: the average economist estimate as surveyed by Bloomberg. We hope that using the average from the best economic minds in the financial sector will increase the accuracy of our model, if not, then we know who to blame!

Is the service sector weighing on jobs growth?

Overall, our forecast is a little below consensus, but we are confident that 181k roughly reflects the current pace of jobs growth in the US, and last month’s reading of 98k was a blip. The one area of concern is the ISM non-manufacturing employment component. In April this fell further to 51.4 from 51.6 in March. Due to the importance of the services sector to the US economy, if jobs growth in this sector is slowing, then it may be hard for the rest of the economy to make up the jobs tally, which could leave us with below consensus jobs numbers for some time.

As we mention above, the ISM-Non Manufacturing employment data is only one component of our model, so, for now, we are happy to keep it as one input of 4. However, if we see another month of disappointing jobs growth then we will take a deep dive into the BLS data to see if the services sector is the problem. If so, then we will increase the weighting of the ISM non-manufacturing employment input in our model.

Why another weak reading could be a warning for stocks

A reading around consensus of 180-190k could have a fairly muted impact on the markets. But, if we see another weaker than expected reading this could spook the stock market. Right now, the US indices are trading at relatively high valuations, the Nasdaq’s P/E ratio is currently at 32.91, while the S&P 500’s P/E ratio is 21.30. These valuations are going to start looking rich if the US jobs market is showing signs that it is slowing down, suggesting a weakening of the economy. We would also expect a weaker reading to weigh on the dollar.

Alternatively, if the data beats forecasts and we get an NFP figure above 200k and the March data is also revised higher, then this could be seen as a green light for investors’ who may continue buying stocks even at these higher valuations, if the US economy looks like it is in a strong position.

Overall, the April NFP report is crucial for two reasons. Firstly, to get a gauge of US economic strength, and secondly, to see if the City Index prop model can get any better at forecasting the NFP number! On both counts, we will have to wait to see the actual data on Friday at 1330 BST.