Here’s how to decipher the numbers and possible market reactions

For once, the US NFP and labour market data is going to be important.

Earlier in the week I tweeted some quick thoughts on why today’s jobs numbers will be important (click on the tweet to see the thread).

Now we need to work out the likely market reaction to the numbers. There’s really three main components;

  1. The NFP number
  2. Wages
  3. Unemployment rate

The NFP number

It’s a lottery at the best of times. There’s been nothing to flag any problems in any of the other jobs data or survey employment data. Both ISM reports showed employment gain trends of 33 months (manufacturing) and 63 months (services). The 4 week average on the initial jobless claims is still near multi-year lows. Other PMI’s/index data has shown some mixed numbers but they are minor and normal fluctuations. There’s nothing signalling wholesale problems in the jobs market but that still doesn’t rule out a wonky NFP number. So, obviously the market/algos are going to jump on anything wild there (good or bad).

For trading, take note but don’t let it guide your view entirely.

Wages

Big for inflation measures, and for consumer data watching. Expected to come in at 0.3% vs 0.2% prior m/m & 3.2% unch y/y. My rule of thumb is to give a 0.2% variation to the y/y number. If it’s within 0-0.2% of expected, the less reaction will see in prices. Over 0.2%, the bigger the reaction will be. In the case of the way the market sentiment is, it’s almost itching to see a bad number so even a minor miss might be trouble. I also don’t think a good number (unless exceptional) will bring a big or lasting move. We may see some relief from a good number but I don’t think it’s going to change the market’s mood on the Fed that easily.

For trading. If we get good numbers and you’re in a trade that benefits, think about taking profit on any quick gains, or at least lock them in. the good news might not last (over the following sessions). A bad number will really be fodder for the Fed cutters and we could get another wide ranging reaction (bonds, stocks, USD).

Unemployment rate

This thing is at the lowest since forever at 3.6% (exp unch). It’s really the key number for judging the state of the labour market. Even 4% was a superb number so it’s really exceeded all expectations. The reality is that even if it did bounce back to 4%, that’s still no disaster for the US. But, as mentioned above, it’s all about the market’s perceptions right now and bad news is bad news, even if the wider context is ignored.

But, we always have to take this number in conjunction with the participation rate because that’s a big factor in this number. The unemployment rate dropping is good news but not so much if participation drops. That means people dropping out of looking for work. Conversely, the rate rising is not necessarily bad news if the participation rate rises. We have to be quick to factor the participation rate into the unemployment rate for a true read.

For trading. Again, we’re likely to see a knee-jerk if there’s a big variation before traders factor in the participation rate. A jump to say 3.7%-3.8% will get the US economy bears excited but in the bigger picture, it certainly won’t be a disaster. If it does drop and it’s a real drop and not a simple participation rate induced drop, we’ll see the Fed cutters run for cover.

Overall, we have to be fast to decipher the numbers. There’s plenty of variations we could get (NFP bad, wages good, unemployment bad, wages bad, NFP bad, unemployment good etc etc etc), so get a grip on the overall picture before thinking about jumping in. If you’re unsure or lack the conviction, stay out, watch the show and look to pick a trade on the outlook after. I very, very rarely take a position into this nor in the immediate seconds after (unless I read things really quickly and can get in at good levels), preferring to try and catch stretch points against any wider technical levels where moves might run out of steam, or where I think they’ve gone to far vs the wider fundamental picture.

This data can be complex and in today’s context could be very volatile, so there’s no need to be a hero just because there might be big moves on the cards.

As always, we’ll be on the ball deciphering the data as fast as possible so watch the live blog for the fastest updates. Because this one might be particularly volatile, we’ll just focus on the 3 main components listed above and the possible reactions. Keep an eye on US 10 year yields for wither breaking above/below this sticky 2.10-14% area, or testing and cracking 2.0%. Bonds have been leading USD so keep a close eye on them.

Don’t forget to enter our NFP competition to win access to our live trading room and a one month sub to Livesquawk.

Good luck and stay safe if you’re going to be trading it.

Ryan Littlestone
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