October Nonfarm Payrolls - A Primer

Tomorrow is Payrolls Friday, and while we have already now had the announcement of the taper, it is likely to be a key driver of interest rate expectations going forward. All eyes will be on whether the jobs number is better than expected since if this is the case then we'll likely see a faster expectation for rate hikes. Once again, I'm burning the midnight oil to keep my loyal subscribers up to date and prepared for potential market moves tomorrow. 

Recent ranges in EURUSD are quite compact, so a big surprise in either direction could be a driver of a real FX move higher or lower. 

NOTE THAT DUE TO DAYLIGHT SAVINGS THE REPORT WILL BE AT 1230 UKT!!!!!!!!!!!

A quick primer on the payrolls report: 

The Nonfarm Payrolls report is released monthly and contains a whole host of data about the labour market in the US. In normal circumstances, it would be a big market mover but since COVID hit moves have been a bit more muted. 

What's the market expecting? 

The prequel to payrolls (that is... ADP) was very positive and well above expectations. Unfortunately for those trying to read the crystal ball, this has limited prediction property for payrolls generally. 

The consensus estimates appear to be around 450k. This is about similar to what economists have predicted for the 2 previous month. However, market watchers (and blog followers) will know that those forecasts were incredibly off the mark with actual numbers significantly below. We didn't even rack up 200k jobs in September. 

Many economists are suggesting this month will be better now the worst of the delta variant has passed, but I am not so convinced. Most of you will know I tend to pick a bullish payrolls estimate, but I'm not entirely convinced. I'll go a bit below consensus - maybe 350k jobs. Sure there will be some Christmas hiring, which should lift the number from last month, but I'm not convinced this will have severe effects on the number (largely because it's already seasonally adjusted :) ). 

What's The Trade? 

It's an easy one payrolls. If the number is better than expected, get long the USD, if it's worse, get short. Truth be told though, I suspect the market will treat anything between 300k and 600k jobs as a consensus number since previous months have been so wildly off. 

I'd also keep a firm eye on gold... a weaker number here could be a catalyst for higher, and recent ranges mean that TP levels should be quite easy to keep an eye on. 

At this point, I'm going to steal from FXStreet and share their scenario analysis... which this month I largely agree with. 

Obviously, we've already had the announcement of the taper, but a good question is... what might cause the Fed to speed up the pace of tapering? Or become more hawkish on the rate hike front? 

To me, no number would be good enough for the Fed to consider this at the current moment - isolated data points are not what the Fed is interested in. The thing I will be watching, however, is the participation rate. This has remained depressed since the pandemic and if we were to see a big increase in participation (now that COVID-19 extended benefits are all wearing off) this could be very supportive for the Fed's view of transitory inflation. 

This participation rate has remained stubbornly low. One of the interesting questions at the Fed meeting the other day concerned this and Powell said the Fed sees no sign of a "wage price spiral" at the moment. The question is if US labour force participation remains subdued, how long can this statement hold true. It's a slow burner but definitely one worth monitoring. 

As always, if you've questions, comments, or suggestions on anything I should take a look at markets wise then please do drop me a line.