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"Payrolls Should Be Boring: Two Numbers Can Make It Exciting"

From Steven Englander of Rafiki Capital

Even when non-farm payrolls (NFP) are as neglected and downplayed as this time around, you have to ask yourself what it would take to make them meaningful. The reason for the markets disinterest is that no one thinks the Fed is going to raise rates earlier than December and we have four more payrolls releases beyond tomorrow's release before they have to decide. And even though Janet Yellen has been certified as a ‘low interest-rates person’ she is unlikely to cut rates any time soon.

We have only one additional release before the expected balance sheet reduction announcement. But it would take a lot to put some uncertainty into the balance sheet shrinkage . Especially because claims have been extremely stable at extremely low levels, no one will trust an isolated softish NFP number. The consensus on NFP is 180k.

That said, below 130k and with some soft survey indicators softening, I think investors get nervous. It's a bit awkward for the Fed, having told us that balance sheet reduction won't do any damage. But say we get  two 130k prints on NFP this month and next, they may very well decide that a brief delay is prudent and that 'relatively soon' extends well beyond September. So 130k or lower on Friday means you have to worry a bit that the labor market is coming off the rails. Anything above 150k seems plenty good enough to go ahead with balance sheet reduction. Bond yields may come off a bit more if we print below 160k even though that is good enough to get balance sheet reduction going.

What about a good result? Problem is we have strong NFP recently and the 180k consensus suggests that a firm labor market is priced in. So 250k on its own is not enough to put a September hike on the calendar but it could firm December odds slightly.

I am skeptical that hourly earnings are enough to turn things around on their own. Most forecasters are aware of the calendar issues so the consensus reflects this. The question is whether an 0.4% is enough to change perceptions. Aberrations happen -- 0.3% m/m is pretty common, especially in months when the 12th and 15th are in different weeks. Over the last couple of years we have gotten one or two 0.4% m/m prints annually without it being a signal of a real rise in wages. Wage acceleration is a slow moving process, so it is more likely to be signaled by a small shift up ward than a big inflation runup. However, 0.5% would be hard to ignore since it was last seen in 2008. There have been more sighting of carrier pigeons, and many more of Elvis, recently.

With some trepidation, I would argue that 180k on NFP and 0.4% m/m on wages are a fade. There are too many investors wanting to buy EUR and sell USD so any price move would be seen as a USD selling opportunity.

However, if we get a 250k and an 0.4% (or higher) the effect could be longer lasting. If it looks like boom time in labor markets, it makes sense that there be spillover into wages. Whether this would be good enough to reverse the USD trend is doubtful – we would need other confirmatory data. But it would make it a two-way market in FX and fixed income.

The UR matters much less than usual, given the shifting around of NAIRU views among policymakers. Deep down, investors understand that it is convenient for the Fed to now have NAIRU estimated 0.25-0.5% above the current unemployment rate but no one really believes these estimates, given their fluidity.

For the record, I am looking for 160k on NFP and 0.3 or 0.4% on hourly earnings and 4.3% on the unemployment rate. This would generate a bit of a chopfest, with markets trading erratically, but I think USD would end up lower.