Non-farm payrolls playbook - will it prove to be a volatility event?

What does a poor read look like? Well, the consensus now sits at 1.48 million jobs created in July, with the economist’s guesstimates ranging from 3.21m to -600k – the best-ranked economists this year (in the Bloomberg survey) is calling for 1.1m jobs. Here is the distribution curve.

Let’s not forget the unemployment rate is expected to fall to 10.5%, with average hourly earnings at 4.2% (from 5%) and underemployment likely to pull back from its current lofty heights of 18%.

Lead indicators suggest a number closer to zero

In terms of lead indicators, we’ve seen a poor ADP payrolls, and sizeable contraction in the employment sub-component of the services ISM report, and the Challenger, Gray and Christmas employment report announced 262,649 job cuts in July – the third-largest monthly total on record. Hardly makes for encouraging reading and suggests on the face of it that the NFP print should come in sub-1m and maybe closer to zero. This would be poor considering the NFP report covers the first two weeks of July (the ADP report covers the full month) and during that time continuing claims fell by around 1 million.

This July read will also represent the last month of hiring that has been a factor of re-openings - the August print will be a whole new game, hence why we need to see a fiscal stimulus agreement through Congress sooner.

Low conviction in forecasting

We also need to consider that it really is finger in the air stuff and economists have low conviction in forecasting ability. I guess this is best portrayed by the massive 3.8m range of economist’s calls – how are they seeing it so differently? If you’re anywhere close to the final outcome, you’ll be the first to put notes out to clients telling them how your logic held up.

Distribution of economists NFP calls

(Source: Bloomberg)

What is most important for traders is not so much the exact number, but whether there are upside of downside risks to the consensus expectations and whether this represents a volatility event. This is true of all known event risk and I want to know if I am long gold or AUDUSD into the data release whether I run the risk of this moving wildly on something that is totally outside of my control. Where I question if I reduce my exposure or close out altogether – basic risk management.

So, while the signs are that we see a below-consensus print, would a number closer to zero do much to markets, or put another way, is it a risk to portfolios? Well, the NAS100 will probably rally no matter what; that’s what it does, or at least the Big Five will – Apple, Amazon, FB, Microsoft and Google. These names will be hoovered up on weakness as they are a momentum juggernaut and the path of least resistance is higher, either until the Fed start to make noises about frothy parts of the market, or as Goldman Sachs pointed out yesterday until we find a vaccine. This would trigger better selling in Treasuries and promote funds to rotate from growth into value.

Bonds will rally on a poor number, and even on a good number, the selling shouldn’t be too pronounced as traders just start talking about the higher frequency numbers being more important. Consider, we’ve just seen a better-than-expected weekly jobless claims, with 1.186m filing for unemployment insurance and continuing claims dropping to 16.1m – a new post-pandemic low – and we’ve seen yields lower by a basis point. Maybe that’s because the weekly claims are less impactful than the NFP’s, but it’s a sign that yields will not rise too intently on a good number. Anyhow, it’s the inflation-adjusted Treasury yield which seems to be most important for markets and good numbers just boost inflation expectations and further lower real yields. Certainly, that is what gold and silver are watching and both are flying at present and looking remarkably like the FAANG basket!

Risks to the USD are symmetrical

In FX, weak numbers, in theory, are bad for USDJPY and USDCHF (and vice versa) and this is where we’ll see traders questioning the US recovery story. We’re seeing net sellers of USDJPY into NFP, but the downside looks rich into 104.80/50, which as I mentioned earlier in the week, this area has been a huge support zone for over two years. A move here and we’ll be hearing a lot of jawboning from the BoJ about watching FX markets next week.

AUDUSD and NZDUSD are powering ahead and both are bid into the start of Asia trade, simply following US equity markets – AUDUSD now the highest since February 2019. The AUD/equity correlation should remain, with the pair taking its direction from S&P500 futures, so if I were truly worried about NFPs, I’d be hanging out in the crosses and putting AUDNZD on the radar, and notably for a closing break of 1.0830.

EURUSD is a tough one as price is consolidating and giving us very little at this point, as we see from the 4-hr chart. Looking at the options market, it’s still early doors but the pair has the feel of trading a 1.1960 to 1.1790 range which seems punchy.