ADP Jobs Preview: A sandwich between Powell and NFP

• Economists expect ADP’s private-sector jobs reports to show an increase of 195K jobs.
• Market participants will hear from Fed Chair Powell before ADP.
• Upbeat numbers could potentially have negative implications for the markets.

Last month, the Automatic Data Processing (ADP) employment report came in below expectations, showing that private sector employers added 106K jobs in January. Two days later, the official Nonfarm Payrolls (NFP) report shocked with a gain of 517K jobs in January, far above the 223K of market consensus and in a different direction of the ADP. All the effects of the ADP were most than offset with the NFP.

Source: FXStreet 

Market participants and probably Federal Reserve (Fed) officials pay more attention to the NFP figure. This week's numbers will help them see if January’s impressive numbers are sustainable or not. The ADP Employment Change number could be seen as a preview or a confirmation if numbers shock in either direction. Any other outcome would likely have a minor impact considering that the Fed Chair, Jerome Powell, will give testimony in the US Congress on Tuesday and Wednesday.

Even a surprising ADP could have a limited impact, overshadowed by Powell and ahead of Friday’s NFP. The US Dollar arrives at a critical week with the recovery rally from multi-month lows losing momentum. Powell (and later NFP) has more potential than ADP to either, boost it to fresh highs, or to end the rally.

Positive or negative news?

Fed officials want the labor market to cool down to help in curbing inflation. A tight jobs market means a go-ahead for the US central bank to remain hawkish, which is detrimental to stocks but favorable for the US Dollar. The latest round of US data moved further away expectations about a “Fed pivot”. Now markets see higher interest rates for a longer period of time than previously thought.

In such a scenario, numbers that point to a slowdown in the labor market could be welcomed news for stocks. Under that assumption, we could expect some “pivot” discussions. But traders will likely wait for the NFP for clearer signals.

Market reaction

On Wednesday, at 13:15 GMT, ADP will release its report for February. The economic calendar shows an expected increase of 195K jobs, an acceleration from January’s 106K. 

The ADP report on Wednesday will be combined with Powell’s comments. If ADP shows the private sector employment rose by more than 200K, it would reaffirm the “higher for longer” scenario, offering support to the US Dollar and should be negative for US Treasury bonds. On the contrary, it would take a contraction in employment to weigh on expectations. A negative reading could be positive for equities, emerging market currencies… for all, except the US Dollar.

Numbers on Wednesday near expectations could be ignored by market participants that will probably still be digesting Powell’s words and looking toward NFP, to see February numbers and revisions to January’s figures.

Whatever happens after the ADP could be quickly reversed on Friday, if history repeats itself.