November Nonfarm Payrolls Primer

Tomorrow is Payrolls Friday and once again it's going to be a critical payrolls report. In the last few days, we have heard increasingly hawkish noises from various speakers of the FOMC. The most notable has been from Powell, who has been quick (since his reappointment was confirmed) to turn up the hawkish noise - suggesting a discussion on a faster taper will be relevant at the next meeting. 

Thus, the pace of job gains in the economy will be critical to determine whether or not a faster taper is a good idea. A weak number on Friday will likely be enough to keep the Fed on its current taper timeline for another month at least. Conversely, a strong number will almost certainly give the Fed the confidence to increase its pace of tapering. 

Source: US BLS, FRED

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. Through the pandemic for a time it was less important, but generally it is a critical and highly watched piece of data. The employment report is likely to shape the Fed's reaction function from now on, unless inflation becomes even more persistent. The report is release on the first Friday of the month at 08:30 ET (that's 13:30 UKT). 

What's expected from the report?

In the previous report, we had very strong monthly gains at over 500,000, and the market took this as a sign that labour market pressures were easing. It is interesting to see that the JOLTS number (that is, the number of jobs market vacancies in the US), has ticked down slightly, although it should be noted this data is delayed (latest is for September). 

Source: Refinitiv 

That said, there's no doubt that openings remain at very elevated levels compared to pre-pandemic. This means that there is still significant labour market tightness, despite the gradual grind lower in the unemployment rate. Thus, I would not be surprised to see the number on Friday to be a supply side indicator once more. The October report was difficult to digest because on the one hand a big beat means the Fed can hike quicker, but on the other it means supply side pressures are easing so there should be less upward pressure on wages, reducing inflation. 

I suspect a similar dynamic could be at work in this next report unless there is a very significant beat to the number. 

Consensus Estimates: 

In a Reuters survey for Friday, the median estimate currently sits at 550k jobs. This seems reasonable to me, perhaps a little low but still reasonable. The ADP number (which is essentially a private payrolls preview for the NFP number) came in at 534k today, although there is usually very little correlation between the two numbers, so read what you will into that :) 

We're in the run up to Christmas, and obviously last Christmas the pandemic was still having a pretty significant effect, so even with seasonal adjustments I think this could be a pretty strong report. 550k seems about right, maybe we'll get a little higher or a little lower, but I'd be surprised to see a big miss. 

What's the trade? 

For me, I want to be long USDs into the report. I think the supply side element is less of a factor now the Fed is being more aggressive in its hawkishness, email subscribers will receive some more short-term ideas on the day, so please fill out the form if you would like to be on the distribution list. 

With that said, I am longer-term expecting a bit of EUR strength into year-end, and also more GBP weakness, so my preferred option for the next month or so is to be long EURGBP. 

Good Luck to All.