Your Last Minute Payrolls Preview: What Wall Street Expects

While it may not be "the most important jobs number ever" (that will likely be next month's which comes just days ahead of the all-important December FOMC decision), today's payrolls number will either reject the the recent trend of slowing growth in US employment (the first 9 months of 2015 have averaged 198K jobs, 17% lower than the 238K average for the comparable 2014 period), or validate it which in turn is presenting a new, major headache for the Fed which has to convince the public that the right time to hike rates is just as job growth is slowing down as Bullard told Reuters overnight.

Perhaps notable is that just yesterday, Goldman raised its forecast from 175K jobs to 190K - another headfake to confuse clients or a legitimate concern of an above-consensus print (exp. are at 184k).

And then there are the internals: with the unemployment rate expected to drop to 5.0% (and some see a 4-handle), how is this not sufficient to signal no slack in the labor market, despite a persistent lack of any real wage growth?

All these are questions that have been posed previously without a satisfactory answer.

One thing appears to be clear: a print well over 200K assures a December rate cut, while a big disappointment, such as the September jobs report, will likely send December rate hike odds back to the 30's.

The answer will be revealed shortly, in the meantime here is what Wall Street's key banks expect will be revealed in just over 30 minutes.

  • Bank of America 150K
  • BNP Paribas 150K
  • Morgan Stanley 165K
  • Deutsche Bank 175K
  • JPMorgan 175K
  • HSBC 175K
  • UBS 180K
  • Goldman Sachs 190K

Here is the full preview of the consensus numbers, courtesy of RanSquawk:

  • US Change in Nonfarm Payrolls (Oct) M/M Exp. 184K (Low 75K, High 250K), Prev. 142K, Aug. 136K
  • US Unemployment Rate (Oct) M/M Exp. 5.0% (Low 4.9%, High 5.3%), Prev. 5.1%, Aug. 5.1%
  • US Average Hourly Earnings (Oct) M/M Exp. 0.2% (Low 0.1%, High 0.4%), Prev. 0.0%, Aug. 0.4%

October’s NFP release will be in strong focus following the more hawkish than expected FOMC rate decision last week, where the Fed stated that slack in the labour market had diminished. Following the meeting, FFR futures were pricing in a 50% chance of a hike in rates at the meeting on the 16th December vs prior to the meeting where chance stood at a lowly 4%, yet have now moved to 56%. Fed Chair Yellen stated on Wednesday that the FOMC thinks that it may be appropriate to move in December, however, no decision had been made yet.

In terms of the recent labour data; Wednesday’s ADP release came in marginally higher than expectations at 182K vs. Exp. 180K (Prev. 200K, Rev. 190K). Furthermore, the ISM non-manufacturing PMI employment component printed at 59.2 vs. Prev. 58.3 whereas the ISM manufacturing PMI employment index came in below expectations at 47.6 vs. Exp. 50.0 (Prev. 50.3). Additionally, the US Employment Cost Index for Q3 came in at 0.60% vs. Exp. 0.60% (Prev. 0.20%), which Fed Chair Yellen previously stated a data point in focus.

Given the solid ADP reading on Wednesday, expectations are now solidifying that the NFP report will show a recovery following the disappointing results of the previous 2, which averaged 139k. Furthermore, participants have stated that the overall tone of the labour market is relatively upbeat with this release being touted as one of the most important from a Fed point of view regarding potential lift off in December.

Market Reaction

This month’s reading is likely to have a strong impact on all US asset classes, given that December is now highly touted as a date that Fed could raise interest rates. It will still require a figure to be equally as poor as the last two results or to be significantly under expectations for participants to take off their December bets. Consensus among analysts is that a number above 100K would still justify a rate hike in December from the Fed’s point of view. In terms of the release itself, a result higher than the ‘psychological level’ of 200K is likely to see USD strength alongside flattening of the US yield curve as investors see recovery in the jobs market and reaffirm their expectations for December. However, if the NFP report was to produce a 3rd disappointing result with no upward revision to the previous release, this could result in the unwinding of some of the more hawkish positions regarding lift off in December. It is likely that volatility will be observed given the different interpretations by participants during the release

Away from equities, one other asset class everyone is focused on currently are TSYs. Here, courtesy of Bloomberg, is a summary of how bonds reacted to the past 6 jobs reports, of which 5 triggered rallies and 1 spurred a selloff:

Sept. data released on Oct. 2; NFP rose 142k vs 201k est.

  • 10Y yield fell as much as 13.5bp to 1.902% and closed down by 4.3bp while 5Y yield fell as much as 19.5bp as market priced in a lower chance Fed would begin rate hikes this year
  • SPX rose 1.43%

Aug. data released on Sept. 4; NFP rose 173k vs 217k est.

  • 10Y yield fell as much as 5.5bps and closed down by 3.5bps while 2Y yield rose as much as 2.6bps to 0.729% as market priced in higher chance of Sept. rate increase
  • SPX fell 1.53%

July data released on August 7; NFP rose 215k vs 225k est.

  • 10Y yield fell as much as 6.1bps and closed near session low while 2Y yield rose as much as 4bps to 0.741% as market priced in higher probability of Sept. rate increase; 5/30 curve flattened to 123.8bps, lowest since April 22
  • SPX fell 0.29%

June data released on July 2; NFP rose 223k vs 233k est.

  • 10Y yield fell as much as 6bps and closed down by 4bps while 5/30 curve steepened to then-highest level YTD as avg hourly earnings were flat vs expected increase, and May increases in NFP and avg hourly earnings were revised lower
  • SPX fell 0.03%

May data released on June 5; NFP rose 280K vs 226K est.

  • 10Y yield rose as much as 12.8bps to highest level YTD and closed higher by 10bps, 5Y yield rose as much as 14.2bps and closed higher by 9.9bps; TIPS breakeven inflation rates widened after avg hourly earnings rose 0.3% vs 0.2% est.
  • SPX fell 0.14%

April data released on May 8; NFP rose 223K vs 228K est.

  • 10Y yield fell as much as 8.1bps and closed down 3.2bps, 5Y yield fell as much as 10.6bps and closed down 7.4bps, as avg hourly earnings also rose less than forecast; curve steepened ahead of following week’s quarterly refunding auctions
  • SPX rose 1.35%