SEPTEMBER NONFARM PAYROLLS PREVIEW!!

 Hi Everyone and happy Payrolls Friday! This may be one of the most important NFP reports of the year because it will have dramatic implications for Fed policy decisions. 

At the last Fed meeting, Powell said that "if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted". Basically this means that if this jobs report is decent in the eyes of the Fed, then we are likely to see a slowing down of the quantitative easing program (currently running at 120bn a month). 

In layman's terms, this means the money printer is not being switched off, but slowed down gradually, so a bit less brrrr. In Powell's own words, the "substantial further progress" condition for tapering asset purchases has been "all but met" and to me this says that it would have to be a pretty miserable number (less than 200k) for the Fed to delay the taper. 

What's expected from NFP? 

This is a little bit of a tricky question to answer since the range of predictions is so wide, but at the moment the consensus estimate (the median from a Bloomberg survey) stands close to 500k jobs added, but the low estimate is for 0 and the high estimate for over 700k. 

Personally, I expect this to be a pretty bumper number given than economists were dramatically wrong last month. Obviously, the actual number of job creation one month is largely independent from the prior month, but I'm working off the biases of economists - they overestimated sizeably last time, so likely to underestimate this time. I'd be looking for something like a 600k, but don't expect this to dramatically move the market given how wide the range of estimates is. 

Something which might be even more interesting is the participation rate: 

Enhanced unemployment benefits ended in September and this is likely to be a key driver of people returning to the workforce. US participation has been significantly below pre-pandemic levels and has been stubborn in rising higher, perhaps due to the ability for many to earn more while claiming supplementary benefits than as a result of the unwillingness to work. 

Likewise, JOLTS openings in the US (a measure which looks at job vacancies) are at record highs and continuing to climb. This means that when this labour force decides to return to work, there should theoretically be plenty of jobs available. This importantly also means that labour cost pressures should ease somewhat and curb the excesses of inflation, but that's a topic for another day. 

Overall: 

I think we could get a pretty bumper payrolls report today. There's a lot of reasons for an upside surprise and I'd like to stick with this view. 

But what's the trade? 

This is tricky because reading some of the primers this morning it seems like a lot of people are expecting a decent number and potentially a decent amount of upside to the consensus. 

Therefore, a number like 600k might not have much immediate market impact - at the end of the day a number like that means the Fed begins to taper at the next meeting. 

That said, if we get a much larger number in the million region (I'm not expecting this) then this will force a repricing of bond yields dramatically higher in my view - potentially a 10bps jump in the US 10y. 

So, the clearest way to play this is via the fx market. I wouldn't put any trades on before the news release, but once we are there if we have a bumper number definitely jump in and get long the USD. I'd probably play it against something like a short NZDUSD - because NZD has been becoming more dovish and this bumper number would make the Fed more hawkish. 

But anyway, that's all for now and I'll try and bring some commentary around the release too - although I will be in a lecture so might be a bit late to the party. 

Happy Trading All. 

UPDATE: an earlier version of this report said the fed was doing 120bn a week of QE, this was wrong. It is 120bn a month.