Everyone has heard the phrase "this is the most important jobs report ever", and virtually every time this has been an exaggeration. However according to an analysis conducted by BofA's Vadim Iaralov, the nonfarm payrolls report on December 4 (a day after the just as critical ECB announcement, but more importantly 12 days before the Fed's "historic" December 16 "rate-hike" announcement) may just indeed be the most important jobs number. Ever.
Here is why, according to Bank of America:
With the much-anticipated 16 December FOMC meeting around the corner, the 4 December US non-farm payrolls (NFP) is one of the most important remaining data points. The significance of recent NFP surprises in driving asset prices has been increasing since summer 2014 and is near historical highs.
We last observed this pattern of market behavior during the 2004-2006 Fed hiking cycle, suggesting this relationship exists due to market expectations for rate policy normalization.
During the previous hiking cycle the importance of NFP surprises rose ahead of the first hike and continued to rise until the end of the hiking cycle. Despite high anticipation for the next Fed hike, the importance of the employment report could remain elevated even after the initial liftoff. This relationship is particularly pronounced now as the Fed has adopted a data-dependent stance, and each NFP report will likely continue to play a key role in informing the path of subsequent Fed policy decisions.
The importance is actually quite simple: if the report is a solid beat, and if the Fed beats, that means that the stronger the economy, at least as measured by the jobs report, the steeper the rate of hikes will be, the more negative the impact on risk assets. Perhaps this is why so many sellside firms have been setting the stage for a "newer normal" in which a monthly increase of 100,000 jobs is actually warmly greeted by the Fed, even if in reality it means that the US economy is actually stagnating and barely covering the natural rate of growth.
So what does this mean for various asset classes:
In past hiking cycles, financial assets all became more correlated to NFP surprises heading into the initial hike as the market began anticipating Fed policy changes. Currently, the importance of NFP surprises is elevated for USD pairs and rates, but low for equities.
This is an important divergence from the previous hiking cycle when all three asset classes exhibited consistent reactions to NFP surprises. Historically, on positive surprise days, dollars and equities rallied while rates sold off.
Here is something surprising: according to BofA "Currently, equities are unsure of how to react to a December rate hike."
And it all goes back to what we have been warning about for a few months now: if the Fed hikes, it would be a policy error, one from which the Fed may not recover:
One possible explanation for this divergence is that a December hike would take place at a time when global growth has been slowing rather than accelerating. World GDP YoY growth has been declining since 1Q14, whereas it was increasing during the 1999 and 2004 hikes. Another potential reason is the hike could disturb global imbalances from years of zero-interest rate policy. For these reasons, the risk of a policy mistake is greater than during previous hiking cycles.
None of which makes the December NFP any less important, however it does mean that just like the Fed's taper announcement in 2013, and the Fed's "hawkish" announcement which sent stock surging, the market reaction to next Friday's jobs report will have some solid support from the trading desk located on the 9th floor of Liberty 33, and, of course, its ancillary market spoofing division in Citadel.