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On The USD Reaction To Tomorrow's Payroll Report

Tyler Durden's picture


The new-normal bizarro world in which we live and trade requires a new set of un-common-sensical thinking to succeed. As we noted earlier, perception is far more important than reality (at least in the short- to medium-term), and tomorrow's payroll report could well be the most egregious example of this yet. Citi's Steven Englander agrees, noting that it seems very possible that the focus will be on the unemployment rate (UR), because of its political importance, rather than the non-farm-payroll (NFP) change, despite its greater economic importance. Given the high correlation to equity (risk) price movements and the focus of market movements likely being driven by the unemployment rate - the question becomes to what degree political factors will offset the negatives typically associated with economic slowing - and what the USD reaction will be to various ranges of NFP and UR.



Via Steve Englander, Citi:

Tomorrow’s payrolls may be the most important economic release until the election. It seems very possible to us that the focus will be on the UR because of its political importance, rather than NFP, despite its economic importance. Many analysts feel that a Republican Presidential victory will be better for the asset markets, at least in the short term. There is some room for debate on this, but it is probably the consensus working assumption.


Our conclusion is that the UR may be a more important driver of FX market reactions on Friday than payrolls, and that the most risk positive/USD negative outcome is a run-up in the unemployment rate, accompanied by a strong payrolls print, essentially the opposite of last month’s release.


There is one more release on Nov 2, but tomorrow’s may set the tone of the next month of campaigning and be the more important.


Citi’s NFP forecast is very close to that of the market, Citi 110k, consensus 115k. Of 92 forecasts reported on Bloomberg, 87 are in the 85k -145k range, which is a very tight range by historical standards (and no indication that there is less uncertainty about the outcome.)


One unusual uncertainty is how the election cycle will affect the reaction to payrolls. A run-up in the unemployment rate will be negatives for President Obama’s re-election chances, since the UR gets the most political attention.


It is very likely that a weak print tomorrow will be less negative for risk than it would be in December, because of the election factor.  Unlike last month, immediate Fed policy is not in play so it seems likely that, absent the political cycle, market reaction to a payrolls surprises would be in the cigar is just a cigar category – a strong outcome is risk positive and USD negative and a weak outcome is risk negative and USD positive, (Some would question this risk-on/USD-off correlation but it has been broadly in place since 2008 and more recently since May of this year, as the chart at the top clearly indicates).


The question is whether the degree to which political factors would offset the negatives typically associated with economic slowing. Since the indications are that an Obama victory is still the more likely outcome, despite last night’s debate and subsequent narrowing in some election indicators, the bigger FX market reaction may be to bad numbers that are seen as further evening out the odds between Obama and Romney, rather than a strong outcome that restores the skew in Obama’s favor.


NFP Estimates


UR Estimates (prior 8.1%)


So we could be in a situation where the USD reactions from most USD negative (i.e. most risk-on) to most USD positive (most risk-off) are:

  1. Payrolls above 150k and the UR rising.
  2. Payrolls between 100k and 150k and the UR rising
  3. Payrolls below 100k and the UR rising
  4. Payrolls above 150k and the UR falling
  5. Payrolls between 100k and 150k and the UR falling
  6. Payrolls below 100k and the UR falling

In the above we are giving the unemployment rate a lot of weight.


It is possible that investors are sufficiently worried about growth that they will not look past a strong payrolls outcome, and simply breathe a sigh of relief and buy risk if strong payrolls and a falling UR are the outcome.


The tradeoff between the headline unemployment rate and headline payrolls may also not be as canonical as we make it out, so that market reaction to 4), for example, may be more positive than to 3) or even 2).


Finally, we are assuming that good news for the US is bad news for the USD. Some would question this assumption but this correlation remains broadly in place.

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Thu, 10/04/2012 - 23:15 | 2858242 ACP
ACP's picture

Print, fuck the People, Print, fuck the People. We all know the drill.

There's still time to turn some of that fake paper money into some real shiny legit money. Take advantage.

Fri, 10/05/2012 - 04:05 | 2858553 slaughterer
slaughterer's picture

Payrolls: 95K

Thu, 10/04/2012 - 23:23 | 2858256 brockhardman
brockhardman's picture

All of these numbers are bogus unless they are coming from shadowstats.com.  If you think that 8.2 unemployment is bad, wait until you learn what it really is.

Thu, 10/04/2012 - 23:57 | 2858328 akak
akak's picture

Yeah, like Bernanke's laughable and insulting "below 2% inflation". 

If I ever meet that lying bastard, that sociopathic piece of rotten Keynesian snakeshit vomit, I WILL punch the fucker in the face!  And then I will tell him "That was not really a punch, it was only just a hedonically-adjusted tickle!"

Fri, 10/05/2012 - 04:33 | 2858571 let-them-eat-cake
let-them-eat-cake's picture

A quantitively eased play punch.

Fri, 10/05/2012 - 01:38 | 2858436 dexter bland
dexter bland's picture

The difference between 100K, and 150K is 0.008% of the population in either direction. To me it won't indicate an economic transformation, or anything other than statistical noise, unless its well outside that range, but I guess some algos might know better.

Fri, 10/05/2012 - 01:51 | 2858446 dexter bland
dexter bland's picture


"the unemployment percentage number touted and argued about endlessly is the result of 30,000 responders out of millions of households. How accurate can that be? "

"...how accurate is a survey of about a quarter of all employers? The BLS footnote itself says not very. The BLS says that they have 90% confidence that their monthly estimate is accurate to within plus or minus 100,000 jobs either way. That means that if this Friday’s number is reported as 100,000 new payroll jobs, in reality the job gain could be anywhere from 0 to 200,000. And most people would treat the 100,000 number as the gospel truth."


Thu, 10/04/2012 - 23:37 | 2858259 Yen Cross
Yen Cross's picture

Are those inverted V's , or Bull Flags?

    Tyler called it. It's all starting in slow motion!  The currency markets are leading the way. Credit markets are seized, for the lending arm!(any sane sovereign) BUNDS, t-bILLS, JGB's ) ect are fucking pounded into the ground! Yet all their ponzi markets are reading 10 dolla, fucky sucky!

    Welcome to Fantasy Island , TATTOO can place your "gold bars", on star ship one!

Thu, 10/04/2012 - 23:28 | 2858273 DoChenRollingBearing
DoChenRollingBearing's picture

US$, Dow futures and gold do not seem to be excited (at 11:27 PM US ET):


Thu, 10/04/2012 - 23:41 | 2858275 spencer
spencer's picture

Payrolls above 150k and UR up?

Shouldn't they say >150k and UR DOWN?

And then what - USD down?

Why would USD weaken when better economy means less stimulus and maybe higher rates eventually?

Is that bad for the USD?

Sensing some serious B/S here....


Thu, 10/04/2012 - 23:43 | 2858303 WonderDawg
WonderDawg's picture

If you read the article, they explain why. It's political. Most analysts think a Romney win would be better for asset markets, so a strong payroll is good on fundamentals, and a rising unemployment rate is bad for Obama and good for Romney. Best of both worlds for risk, and given the inverse correlation with the dollar, bad for the dollar.

Fri, 10/05/2012 - 01:12 | 2858418 spencer
spencer's picture

I see. Damn. What a twisted logic. But I must give you this - your explanation in 2 lines was better than the whole article.

Thu, 10/04/2012 - 23:29 | 2858276 otto skorzeny
otto skorzeny's picture

I hope the USD dollar gets stronger than Bishop Don Juan's pimp hand-although I think that's wishful thinking. a nice commodity crushing would do more for the US economy than QE ever would-look at the 80's after Volcker took over.

Thu, 10/04/2012 - 23:41 | 2858294 Yen Cross
Yen Cross's picture

Otto, I deeply respect your posts. I'm sublime, as you generally answer most of my questions.

  Political factors aside, we all know what needs to be done.  The government needs to be seriously downsized.

 Would you hire one of those cronies?

Fri, 10/05/2012 - 00:17 | 2858345 otto skorzeny
otto skorzeny's picture

to do what-they have no appreciable skills.

Fri, 10/05/2012 - 00:34 | 2858361 Yen Cross
Yen Cross's picture

  Organic Drone?/spy

Fri, 10/05/2012 - 01:12 | 2858419 DeadFred
DeadFred's picture

They lie well. Maybe a career in creative writing? Oops the BLS guys have that field covered.

Fri, 10/05/2012 - 01:53 | 2858449 CCanuck
CCanuck's picture

They could be Sand Bags at the firing range.

Fri, 10/05/2012 - 04:19 | 2858563 Yen Cross
Yen Cross's picture

     ?/  .>>------)(    sand bag

Thu, 10/04/2012 - 23:41 | 2858301 chump666
chump666's picture

DXY is flat.

Romney and Obama lame ass debate sent the USD lower (because they are both a-holes).  It's now gently bid and holding. 

Number could be Goldman's 100K and on the money. 

Dare we say that it's priced in, thus a sell of stocks?


Thu, 10/04/2012 - 23:46 | 2858310 WonderDawg
WonderDawg's picture

I think anything but a negative print will be viewed as bullish, personally. The markets seem ready to make a move to the upside.

Fri, 10/05/2012 - 00:15 | 2858344 Conman
Conman's picture

100 agree. Beat and we see 1% moves on the indices.

Fri, 10/05/2012 - 01:19 | 2858424 DeadFred
DeadFred's picture

100, which is a really bad number, becomes the standard and if 101 comes in then the market booms on the beat. Because, afterall, expectations of a bad number are totally priced into the multiyear highs that the market's at. Does anyone know where the interdimensional conduit is so I can get out of Bizarro universe?

Rant over.

Thu, 10/04/2012 - 23:47 | 2858312 Yen Cross
Yen Cross's picture

 I hedged aud/jpy (vs)aud/usd.  It was pathetic.  The F/X markets are all chop. I'm not giving any more trade ideas.

  Some one dropped a bomb this morning, and no one filled the vacuum!  It cost me a "high 6 figure loss". I try to work with you guys, but I'm not going to get poached by some fucking China man!

Fri, 10/05/2012 - 00:46 | 2858387 chump666
chump666's picture

try this one, trader has a stop loss, trade stops-out, he doesn't see the swing against him.   why?  it was HFT that knocked out the stop that only a nanex chart would have picked up. 

nasty huh?

Fri, 10/05/2012 - 03:04 | 2858504 Yen Cross
Yen Cross's picture

 Apples and Oranges.   Good call C-Man!  The guy should have placed "out of the market" PUTS!

  Whilst "hedging" his TRUE Trade!

Thu, 10/04/2012 - 23:52 | 2858321 Yen Cross
Yen Cross's picture

 Chump I gave you the trade last night( aud/usd) . Now I'm giving you the "C/B" flow trade. all the commodity ccys' will be 4 handles lower mid next week!

Fri, 10/05/2012 - 00:41 | 2858378 chump666
chump666's picture

aud looks capped.

the market finally looks topped (equities), finally being wishful thinking.  But, i am more inclined to go short.  i've watched so many shorts squeezed then rolled over into a new hedge.  market is far too long on diminishing volumes and smashed volatility.

my gut aches.


Fri, 10/05/2012 - 04:08 | 2858506 Yen Cross
Yen Cross's picture

    Chump get shorty! and make some money!

Fri, 10/05/2012 - 00:13 | 2858342 monopoly
monopoly's picture

This is ridiculous. I don't care. It changes nothing. Move along.

Fri, 10/05/2012 - 00:27 | 2858356 Bear
Bear's picture

"Obama had a bad night on Wed, Unemployement has to come in at 7.9 on Friday just to keep our jobs" ... BLS analyst

Fri, 10/05/2012 - 00:37 | 2858366 Yen Cross
Yen Cross's picture

 My " YOGI Bear" specialist, is 100% correct. Anything "BLS tomorow will be a given. Sell the report either way!

  Watch out for zombies @ your local watering hole!

Fri, 10/05/2012 - 00:42 | 2858379 lewy14
lewy14's picture

My unofficial survey of folks who don't follow politics, news, or much of anything substantive indicates that the understanding of the "unemployment rate" being anything other than complete and utter bullshit has penetrated each and every intellectual strata of society.

Except for... you know. Paul Krugman. He still thinks it means something. Snookie, K Stew, Honey Boo Boo - not taken in by the lies anymore.

Fri, 10/05/2012 - 05:02 | 2858590 ebworthen
ebworthen's picture

When the peasants have a better grasp of reality than the elites is when things get interesting.

Fri, 10/05/2012 - 01:01 | 2858400 Bear
Bear's picture

Well at CNN they are certainly setting BHO for a big win:

"If it's over 100,000 jobs created, that's a win for Obama. If it's under 100,000, that's a loss," a CNN analyst said in so many words earlier today.

Fri, 10/05/2012 - 01:22 | 2858428 Curt W
Curt W's picture

I expect a large "adjustment in the B/D" and another large adjustment for "seasonal" the number counted as unemployed will drop too.  8%

Fri, 10/05/2012 - 02:29 | 2858472 disabledvet
disabledvet's picture

Again another big deal. Market will take a bad print just as it did in the 90's all the time...difference being this time it really does have political ramifications...not so much equity ones tho. Weak dollar is GREAT for equities. At some point internal demand will pick up dramatically...

Fri, 10/05/2012 - 03:23 | 2858514 Yen Cross
Yen Cross's picture

 Do ya guys remember that "hot girl"?  That Crocidile dundee, " Linda Koslowski", swamp _G- string_ bend over?

     Is that one of the best reasons to land a "HOTTY"?

Fri, 10/05/2012 - 03:33 | 2858525 rayban
rayban's picture

Provocative article by a very influent fx strategist. The last sentence, however, appears to be at odds with the 1-6 scale offered immediately before in terms of USD/data correlation.

With EUR/USD at .618% retracement of the recent mini-correction, the price action today will be very telling indeed.

Fri, 10/05/2012 - 04:29 | 2858565 Yen Cross
Yen Cross's picture

U are a fool to trade the ponzi "€ ".  That currrency in it's, "death throughs".

Fri, 10/05/2012 - 04:44 | 2858577 DavidC
DavidC's picture

Just a point of information, it's 'death throes', not 'death throughs'.

I was gobsmacked by its move yesterday, almost a straight line until the FOMC stuff. Amazing.


Fri, 10/05/2012 - 06:25 | 2858639 whirlybird rules
whirlybird rules's picture

Why would anyone think that stats mattered?  When considering the Euro:USD, if you had been told that all the shit that's happened would happen, you would have assumed parity by now.  (And yes! the US is drowning in debt, but!  remember, the US was drowning in debt precisely the same way 1 yr ago.)

The markets belong to the central banks.

Nothing real will happen to the Euro until the populations of Europe react to their circumstances.

Fri, 10/05/2012 - 08:05 | 2858722 orangegeek
orangegeek's picture

In the market conditions we are in, the reports don't matter.


The quality of the data of these reports will become increasingly suspect.


The US government will stop at NOTHING to keep these markets afloat.  The government won't put the government in jail for lying.


Earnings reports.  Now that's  a different story.

Thu, 12/27/2012 - 10:27 | 3098682 kall
kall's picture

It is still difficult to predict the payroll's direction. One thing is for sure: the payroll services will most definitely change in the next years, I just hope they'll adopt the change that makes most people happy.

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