Preview - ADP/NFP Connection Gets Another Test

This month, we'll continue our ongoing study/experiment on the ADP and NFP relationship. To recap, the two reports show reasonable correlation in the long-term, but don't seem to track closely month-by-month. However, there seems to be an exception when the ADP has a large enough deviation between its forecast and actual values. Specifically, when the ADP has a deviation of 40% or more, the NFP tends to follow suit. This means if the ADP comes out at least 40% larger than its forecast, the NFP should beat its forecast, too. If the ADP prints at least 40% smaller than its forecast, the NFP should be smaller as well. This doesn't mean the NFP will be larger/smaller by the same magnitude, though. In fact, the NFP's deviation is often much less, as the ADP tends to be more volatile. So far this year, there have been 4 occasions where the ADP's deviation was more than 40%. Each time, the NFP has followed the ADP's direction in the actual vs. forecast. There's another "trigger" this month. On Wednesday, the ADP printed at 38K, less than half of its 82K forecast. So according to this model, we expect the NFP to print less than its 110K forecast. As always, please note that this is based on a very limited data sample and use due diligence in all trading decisions. Weekly unemployment claims also suggest a soft NFP read. Claims rose throughout August, and the 4-week average of claims has risen five straight weeks. As for the breakdown of the release, most economists expect service-related jobs to have another strong showing. Manufacturing and construction jobs are expected to be weak. This would dovetail with other recent releases. The ISM Service index beat its forecast this week, while ISM Manufacturing had a poor showing. Housing indicators have continued to bottom out across the board. With the continued focus on credit markets and the Fed's next decision, it's difficult to assess the market's reaction. Most likely, a weak reading should boost stocks and thus carry trade pairs. It should also push up the EUR and GBP against the USD. However, Wednesday's poor print on the ADP seemed to have the opposite effect on stocks and carry trade pairs.