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Big Miss In ADP This Week – Will NFP Disappoint Today?

6 November 2020 By Mircea Vasiu

It is that time of the month – the first Friday of a new month is always dedicated to the Non-Farm Payrolls report in the United States. There is only one job report left in 2020 after the one we will see today, and thus traders may form a picture of the labor market two months ahead of the end of the year.

Today’s NFP report is particularly important for at least a couple of reasons. First, it comes at the end of an extremely busy week. The United States elections stole the show from the regular economic data. For once, the NFP week was not/is not about the labor market, but about who wins the White House and the Congress for the next four years.

Second, the NFP report follows a very weak ADP report released two days ago. As it is accustomed, the ADP or private payrolls numbers for October were released on Wednesday, and they completely missed expectations.

October ADP Miss Expectations by 285K

The forecast for the October ADP data showed expectations of an increase by more than 650k. The reality, however, differed, as the private payrolls grew only by 365k. Not that it is a bad outcome – after all, new jobs were created by the private sector four the fourth consecutive month in a row.

However, financial markets tend to build expectations based on a forecast. And then, when the reality kicks in, they react.

The same thing happened to the US elections. Prior to Election Day, Biden was seen as leading in most national polls. Come Election Day, and the race proves to be extremely tight, with votes being counted more than 48h after the polls close.

Out of the 365k jobs created in the private sector, a little less than one third belongs to the small businesses sector. More precisely, businesses with a number of employees between 1 and 49 added over 100k jobs. This is more than encouraging, especially if we consider that the small business sector is one of the most affected during the pandemic.

Can we use the ADP to forecast the NFP? Not necessarily. While there is a correlation between the two, it does not function all the time. Just like the Unemployment Rate and the NFP number may show two opposite things on an NFP day, so can the ADP and the NFP.

All in all, expect volatility to rise, but to focus to remain on the US elections still.