The October jobs report will be marred by data collection issues caused by the government shutdown.
However, the headline gauge of nonfarm payroll creation — the one the market likes to pay attention to — should be relatively clean.
The BLS “establishment survey” from which the nonfarm payroll number is derived counts as employed those who were paid during the survey period, and since federal workers furloughed by the shutdown received back-pay, they won’t drag down the payroll numbers.
“The only way the payrolls data could have been adversely affected by the shutdown is if private-sector government contractors laid off some of their own employees,” says Paul Dales, senior U.S. economist at research firm Capital Economics. “The spike in weekly initial jobless claims in October appears to suggest that this was a factor. That said, the most recent claims figures have also been distorted by a couple of states working through a backlog of claims after switching their IT systems. The upshot is that we can’t say for sure how much of the most recent surge in claims is shutdown-related.”
Given that, and an October FOMC statement last week that, on balance, moved up the probability that the Federal Reserve begins to taper down its quantitative easing program before the FOMC’s March meeting, the Friday nonfarm payrolls report is probably going to be a market mover.
If one word characterises the market’s likely reaction, it’s asymmetric. Most seem to agree that, as Citi global head of G-10 FX strategy Steven Englander puts it, “a good number is unambiguously good, whereas a bad number is ambiguously bad.”
That is, an unambiguously good number should cause the dollar to rally, Treasuries to sell off, and rates to rise as investors re-calibrate toward the possibility of tapering sooner rather than later — whereas a bad number may or may not have the opposite effect.
Englander thinks a “good number” would be a nonfarm payroll print in excess of 150,000. For comparison, the median estimate of Wall Street economists polled by Bloomberg is 120,000, and September’s number was 148,000.
Priya Misra, head of U.S. rates strategy at BofA Merrill Lynch, also has 150,000 on her radar.
“Anything above 150,000 should result in higher rates,” says Misra. “A number below 90,000 will be a rally.”
Tom di Galoma, managing director and head of fixed income rates sales at ED&F Man Capital Markets, expects a print even lower than that, and he thinks the threshold to spark a rally in the bond market is also a bit higher.
“My view is the NFP figure will be weak (around 50,000) and the [Treasury] market will pop higher in price but will be met with selling due to long-end Treasury supply next week and the ongoing new-issue corporate supply, which has been extremely robust,” says di Galoma. “That said, a print below 100,000 should keep the Fed from tapering until March 2014.”
On the other hand, a good number will likely move up the tapering timetable in the minds of market participants.
“FX will take its cue from data’s implications for the timing of tapering,” says Alan Ruskin, global head of G-10 FX strategy at Deutsche Bank. “Any private payrolls number at 170,000 or more will confirm that December tapering is a very real possibility.”
Ruskin believes the October FOMC statement, which failed to acknowledge the effects of the government shutdown on the economy, has lowered the threshold for tapering in the minds of market participants.
“[There is] a little more willingness to entertain thoughts of a December/January tapering,” says Ruskin, as there is “less expectation that NFP has to print 200,000 per month for them to taper.”
A good number need not necessarily cause a big sell-off in Treasuries, though, according to Gennadiy Goldberg, a strategist at TD Securities.
“I think the market reaction to Friday’s nonfarm payroll report risked being a bit asymmetrical earlier in the week, but the market seems to have adjusted as Treasury yields moved higher so far in the week,” says Goldberg. “This is largely due to the more encouraging ISM surveys suggesting that the government shutdown did less damage to the economic recovery than previously anticipated.”
How are investors positioned heading into the release?
“The market is long EUR/USD and long USD/EM,” says Sebastien Galy, senior forex strategist at Société Générale. “If the NFP is strong, EUR/USD will break sharply lower. Similarly in EM, long USD/EM positions are hedges against EM fixed income flatteners. These EM curves could steepen in line with the U.S. Treasury curve, however the market is already positioned for a bearish outcome. If the NFP data is good but not overly strong, this bearish positioning, which is fairly massive, will start to come under pressure.”
Citi’s Englander agrees.
“The most active part of the FX market now looks to be long USD, short EUR, but the market as a whole still has USD to buy, EUR and EM to sell if yields keep backing up,” he says.
In the rates space, BAML’s Misra says investors are positioned for carry trades, which do well in periods of low interest-rate volatility.
“People expect the Fed to be paralysed due to the lack of clean data and therefore a low vol environment,” she says. “That could be a risky position ahead of a volatile payroll report.”