The All-Important Seasonal Adjustment That Everyone Will Ignore: Previewing Today's Non-Farm Payrolls Report

Here is, courtesy of RanSquawk, what a headline-focused Wall Street will be looking for in 40 minutes, when the October non-farm payrolls are released

• US Change in Nonfarm Payrolls (Oct) M/M Exp. 235K (Low 140K, High 314K), Prev. 248K, Jul 180K.
• US Unemployment Rate (Oct) M/M Exp. 5.9% (Low 5.8%, High 6.1%), Prev. 5.9% European
• This will be the first employment report since the Fed announced the conclusion of QE3
• Stronger data of late has increased expectations of a solid October report
• Seasonal factors could also be supportive
• Focus could again may turn to the wage component of the jobs report as the Fed looks to exit easy policy

The expectation breakdown by bank:

• HSBC 195K
• Morgan Stanley 235K
• Deutsche Bank 225K
• Citigroup 230K
• Goldman Sachs 235K
• JP Morgan 235K
• BofAML 235K
• UBS 240K

RanSquawk's commentary on the expectations in context and the anticipated market reaction:

Stronger than expected US employment data for the month of October has supported the idea of a solid October jobs report from the BLS, after ADP beat forecasts on Wednesday and initial jobless claims continues to decline with the 4-week average now at the lowest level since April 2000. October’s ISM manufacturing and non-manufacturing composite also indicated a climb in the employment subcomponent. These factors all point to Nonfarm Payrolls maintaining the trend of above 200K and separately, seasonal factors could also be supportive as retailers and companies such as UPS and FedEx are all hiring for the holiday season. On the other hand, October often sees the last major round of layoffs in the hospitality and leisure sectors. If the unemployment rate declines, then it is likely the Fed will again revise down their forecasts at the next meeting in December. The risk of the unemployment rate falling would most likely occur if the participation rate again declines, however the participation rate has declined for the previous two months and so is more likely to hold steady this month.

Focus could again turn the wage component of the job report as the Fed looks to exit easy policy and continues to alter its forward guidance. In Q3, the Employment Cost Index rose 2.3% Y/Y and Unit Labor Costs rose 2.4%, both showing large jumps from Q2, however the average hourly earnings in the monthly BLS report has stayed relatively range bound over the last 6 months. At last week’s meeting, the FOMC reassessed their view of both inflation and the labour market, commenting that the underutilisation of labour resources is “gradually diminishing”, however, some have suggested that rate hikes and an exit of easy policy will not occur until the gradual diminishment turns into something more substantial, such as a larger increase in wages.

Market Reaction

Due to the numerous data points contained within the report, the initial market reaction is often complicated but a headline reading of over the median expectation of 235K will likely support the equity market and the USD, weigh on Treasuries with the curve flattening in the immediate aftermath. Since Fed’s Bullard hinted that the Fed could consider another round of QE two weeks ago, price action in equity markets has been one way traffic with the DJIA and S&P 500 at record highs, therefore a beat on expectations may not leave too much room for upside. Furthermore, US asset classes have generally been more sensitive to downside surprises in the report, rather than upside surprises, over the last 12 months. As mentioned previously, focus could again turn to wages and if they increase faster than expected then it could bring forward market expectations of the first rate hike (currently priced in September 2015) with the front-end coming under selling pressure.

But by far, this is the most important data point, one which everyone will ignore: the average seasonal adjustment factor for every month's NFP print in the past decade. As one can see, the actual change in October payrolls is about 1 million. In other words the headline driving number, the seasonally-adjusted NFP print, will be purely a fabrication of the BLS's X 13 Arima GIGO engine, which will drown out a HFT-kneejerk reponse triggering signal with about 750 thousand in fudge-factored jobs: a "fudge factor" that will depend entirely on which way the political winds of change blow.

Comments

[Headbanger]

Abercrombie & Fitch imploding on poor Q3 sales!

http://www.cnbc.com/id/102132233

[Smegley Wanxalot]

Good.  That place is pathetic.  I fuckin hate those stores and the asshole customer base it serves.  Die a fucking painful death, A&F.

[TruthInSunshine]

I say print will be 890,000 high wage jobs created.

Abercrombie will merge with Sears/Kmart + JC Penney and the new company will have "synergies" and the stock will be a 10 bagger w/in a year.

[GetZeeGold]

Abercrombie & Fitch imploding

Welcome to Walmart.

Thanks....where's the Abercrombie & Fitch department?

[LULZBank]

Fuck seasonal adjustments.

There are retail stores losing revenues because of the fucking seasons.

[youngman]

I am trying to think what would help Obama more..a low number..or a high number...I need to ask Valerie Jarrett what she wants...and what she wants she gets...

[jubber]

whatever the number its Friday and we will rally to new ATH's after the initail noise, 17750 sounds good + 2050 and Europe will be forced green...?

[NoWayJose]

"Seasonal factors could also be supportive"?

I thought seasonal adjustments work BOTH ways, and when seasonal factors are strong the seasonal adjustment is negative. Or do we only adjust UP when seasonal factors are poor?

[Moonrajah]

Adjusted for the seasonal 32 tanks rolling into Ukraine the US Unemployment rate suddenly became finger-lickin' good.

[SheepDog-One]

Tanks?
You're velcome.

[SheepDog-One]

We've entered into some kind of new super full retard scenario, nothing matters anything is a good reason to go all-in.