October Payrolls set to roar back to life

City Index’s proprietary model is predicting a stronger than consensus number of 354k, get our take on what this means for the market.

On Friday 3rd November at 1230 GMT the latest US Non-Farm payrolls report will be released. This report, like September’s, is expected to be disrupted by September’s hurricanes, and the market is expecting a huge 310k increase in payrolls, which makes up for the -33k reading in September. City Index’s proprietary model is predicting a stronger than consensus number of 354k, however, as we will discuss below, there is a large margin of error for this month’s report, which increases the chance of an unexpected NFP number.

The reason why we are predicting a stronger than expected number for October is because of the following (crude) tweaks that we have made to this month’s model:

  • We removed September’s outlier of -33k and ran this month’s number as if the September reading did not exist.
  • The model came up with a reading of 177k once September’s outlier was removed (if we included the outlier the reading was less than 50k).
  • In a crude adjustment, we doubled 177k to come up with our October figure of 354k, which is why we urge readers to handle this month’s payrolls report with caution.

We assumed that a reading of 177k seemed consistent with NFP readings prior to September that were 210k for June, 138k for July and 169k for August. Considering we haven’t seen a dramatic change in economic activity in the last two months, we assumed it was right to expect jobs growth to follow the same trend prior to September, hence how we came upon City Index’s prediction.

Interestingly, the range of economist estimates as measured by Bloomberg for this report was also wide, the lowest estimate was 120k while the highest was 400k. Thus, we would view all predictions with a pinch of salt this month, and Friday’s reading could trigger a whipsaw market reaction when the data comes out.

The market reaction:

The dollar index has faltered at the 95.00 mark as we lead up to this NFP report, suggesting that this month’s NFP data has the potential to give the dollar some much needed direction, as the long as the number isn’t considered sullied by the hurricane adjustments. As we have mentioned before, a simple correlation analysis has found that the most closely correlated asset class with NFPs were USD/JPY and GBP/USD. Stocks and Treasury yields have no significant correlation of note, which is why it is worth focusing on the FX space on payroll’s day.

Due to the risks around trading tomorrow’s announcement, it may be better to wait for the dust to settle before opening a new position. If we get a much stronger number than expected then we could see the dollar index break the 95.00 mark, USD/JPY test 115.00 resistance and GBP/USD fall further to 1.30. However, 1.3020- the 38.2% retracement of the Jan low to Sept high in GBP/USD is a major level of support, so after today’s decline in the pound there may not be too much room for further downside. If we get a weaker number than expected, say of 250k or lower, then we could see the dollar struggle, which opens the way for a move back to the 112.90 low from Tuesday in USD/JPY, and a recovery in GBP/USD to 1.3150 mark.

Chart 1: 

Source: City Index  

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.