Will the ADP Employment Report confirm subdued US labor market conditions?

The Automatic Data Processing (ADP) Research Institute will release its monthly report on private-sector job creation for January on Wednesday. The so-called ADP Employment Change report is expected to show that the United States (US) economy added 48K new jobs, following the 41K new payrolls witnessed in December.

These figures will be observed with particular interest this time, as the US Bureau of Labour Statistics (BLS) announced on Monday that the release of Friday’s key Nonfarm Payrolls (NFP) report will be delayed due to a partial US government shutdown. With the ADP report as the main reference for US employment this month, a significant deviation in the final figures might have a strong impact on the US Dollar (USD).

US Private Employment — Source: Automatic Data Processing

ADP Jobs Report will test the strength of the US economic recovery

January’s ADP Employment Change report comes in a context of improving optimism about the US economic outlook. A string of positive macroeconomic releases, namely the Q3 Gross Domestic Product (GDP) report and strong manufacturing activity, coupled with sticky inflation levels, have prompted traders to dial down bets of interest rate cuts by the Federal Reserve (Fed), at least until June.

This has boosted a recent US Dollar recovery, also triggered by investors’ relief after US President Trump confirmed that former Fed governor Kevin Warsh will replace Jerome Powell as Fed Chair at the end of his term.

The US economy showed a robust 4.4% anualized growth in the third quarter, according to the final GDP estimation released in January. Apart from that, factory activity expanded at its fastest pace in more than three years, according to January’s ISM Manufacturing PMI report, retail consumption bounced up strongly in November, and consumer sentiment data show a steady improvement over the last three months.

Bearing this in mind and considering that consumer inflation remains steady at levels well above the Fed’s 2% target for price stability, employment figures will be the last piece in the puzzle to assess the US central bank’s near-term monetary policy path.

January’s ADP report is expected to confirm that the labor market remains steady. Market consensus suggests that employment growth remains sluggish, but that employers are not firing either, or at least not to a large extent. This scenario cements the Fed’s stance of a cautious approach to rate cuts.

Atlanta Federal Reserve President Raphael Bostic stated at a panel speech on Monday that the central bank is close to the neutral rate and that monetary policy should remain “mildly restrictive” to get inflation back to the target. Unless the ADP shows a severe setback, this view would apply to the vast majority of the central bank’s monetary policy committee.

When will the ADP Report be released, and how could it affect the USD?

ADP will release the US Employment Change report on Wednesday at 13:15 GMT, and it is expected to show that the private sector added 48K new jobs in January.

The immediate US Dollar trend is positive. The US Dollar Index (DXY), which measures the value of the Greenback against six major currencies, appreciated 2% in the past week. Market’s relief following the appointment of former Fed Governor Kevin Warsh as the next Fed Chairman halted the US Dollar’s bleeding, while bright US economic data, a trade deal with India, and hopes that negotiations with Iran might de-escalate tensions in the Middle East, keep the Greenback supported.

Guillermo Alcala, FX Analyst at FXStreet, highlights resistance levels in the 98.00 area and 98.48 as the main hurdles for USD bulls: “The US Dollar Index is on a bullish correction amid a broader bearish trend, and bulls need to breach resistance at a previous support area around 98.00 to confirm a larger recovery and expose the January 23 high, at 98.48, ahead of the 100.00 round level.

On the downside, Alcalá sees the 97.05 level as key to maintain the immediate bullish recovery alive: “A bearish reaction below the 97.00 level would put the current recovery in question and increase pressure towards the January 28 close, at the 96.35 area.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.