Tomorrow we will get the payrolls data for February 2022. This is going to be a critical report, although I suspect not as important as the February CPI report will be just before the Fed meeting later this month.
The headline consensus number is for 400k jobs added. The prior was 467k. However, it's worth noting the range of estimates for this month - with a low estimate of 200k and a high estimate of 730k.
What is 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).
Expectations:
Expected to come in at around 400k. Although, it must be said that the estimates recently have been miles off the actuals. The range of estimates of 530k so really anything in the range of 300k-500k is probably in-line in my view. Morgan Stanley is highest at 730k, Deutsche with the lowest.
DON'T JUDGE A BOOK BY ITS COVER:
The title of this piece is don't judge a book by its cover - this is simply because there is so much other data released with the payrolls report which I believe is likely to affect the outcome more than just the headline number. For example, I see the unemployment rate number as particularly critical in terms of judging Fed policy further out. Sure, they are certainly going to hike this month as Powell alluded to in recent congressional testimony. However, I still think there are severe risks to hikes further down the line.
Remember, the Fed has a dual mandate for both employment and inflation. The two charts below show the unemployment rate and the participation rate. Note how both ticked up in the previous period. This is a trend I expect to continue - I would not be surprised to see another increase in participation and also a jump higher in unemployment rate.
This means that the initial headline report will be judged, and then it will be a question of whether the other numbers cause the market to reverse whichever way it moves initially.
The unemployment rate has jumped higher in the previous period (Refinitiv)
Participation really jumped higher in the last few months (Refinitiv)
Basically, I will not be trading this event. It seems far too complex to get a clear read on, and I'm not entirely convinced the market will focus on it if we have a lot of headline from Russia/Ukraine as well in the background. The best way to play this, in my view, is in terms of Fed expectations.
Scenarios:
If we get strong headline, lower unemployment and decent participation, I suspect we will see a greater expectation for Fed hikes and hence USD stronger, gold lower and equities probably lower.
If we get a miss on the headline, I think this is unimportant if the other factors point to higher rates. Also be sure to watch average hourly earnings. The Fed has been watching this measure increasingly closely to see if we have any evidence for a WAGE PRICE SPIRAL.
Another big increase in hourly earnings will likely add more pressure for the Fed to hike (Refinitiv)
My Expectation:
Headline number to come in lower, the unemployment rate to rise, and the participation to increase. I will put myself on the line and say headline number of 250k. I expect this miss since forecasters significantly underestimated gains last time, so betting the other way is often a good shout.
In this situation, I expect lower pricing for Fed hikes, and this will likely mean lower USD, higher gold and higher equities. Gold would be the best long in this case since it implies the Fed will be less hawkish despite escalating inflation!
As always, please do reach out with your questions.
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