ADP Nonfarm Payrolls Preview: Going contrarian? How to trade this leading indicator

Consistency is a trait forex traders aim for – and consistency in an economic figure is useful even if that always goes in the wrong direction. A contrarian indicator is as valuable as a straightforward one. 

ADP's monthly Nonfarm Payrolls report provides a snapshot of private-sector hiring and serves as a leading indicator to the official NFP released by the Bureau of Labor Statistics. Wednesday's early publication helps shape expectations for Friday. 

The firm, which is America's largest provider of payrolls contracted renowned economist Mark Zandi of Moody's Analytics to improve the accuracy of its figures several years ago. The correlation between ADP's statistics and the BLS's ones indeed improved. And then came the pandemic. 

During the spring of 2020, when covid shocked the world, the payrolls firm foresaw far worse layoffs than reported by officials in Washington. In recent months, ADP's data has been too optimistic, failing to warn of weaker hiring. In May, the company reported an increase of 978,000 private-sector jobs, yet the BLS reported only a net increase of 559,000 positions, including government ones. 

The US is experiencing a quick reopening from the crisis, but one that is accompanied by hiccups and high levels of uncertainty. Even the Federal Reserve, which was seen as one of the anchors of stability with its unlimited support, is now a source of speculation. It is unclear when and how the Fed withdraws its bond-buying scheme, nor when it raises interest rates.

Trading June's ADP NFP

As long as America and the world remain in a state of high volatility, ADP's figures will likely remain off the mark. For June, the economic calendar is pointing to a rise of 600,000 positions, a result roughly in line with last month's BLS data. 

Source: FXStreet

If the outcome is 700,000 or higher, the dollar would advance on optimism toward Friday's figures. However, as discussed, that could prove to be another false dawn. Investors could undo any greenback gains on Friday, or even beforehand – aware of ADP's misses. The instant knee-jerk reaction is not necessarily the correct one.

The same goes for a miss, in the magnitude of 500,000 new jobs in June or lower. Such a disappointment could set the stage for an upside surprise from the BLS's Nonfarm Payrolls.

What about revisions? Contrary to the official NFP, ADP revises figures for the previous month not according to its own updated data but rather the NFP's statistics. Traders tend to ignore it.

Conclusion

ADP's NFP triggers an action in markets – yet the initial response tends to be the wrong one, providing a trading opportunity.