Non-Farm Payrolls likely to be ahead of the 200k handle, not wildly outside of expectations

Fundamental View

In the wake of a tumultuous session yesterday, we have had some comments from Draghi of varied levels of importance. One of the most important comments flagged yesterday was that “QE does not require a unanimous decision from the governing council”. This is important for a number of reasons: firstly, Draghi can deliver QE with a simple Governing Council majority rather than requiring total unanimity. Secondly it clearly highlights the divide growing within the ECB regarding the best monetary policy path to travel down from here. There was plenty of movement very early on in the session which caused mass volatility. We saw the less-dovish sentiment come in from the Governing Council and, for the most part, removed the immediate risk of QE. We saw large downside in equity markets and Euro strengthen on the back of disappointment. We also saw some fairly heavy revisions on Eurozone growth downwards and also brought down inflation expectations in their forecasts. After European close yesterday we saw ECB source comments come through stating that the ECB will prepare plans for a January QE programme. This programme is to include purchases of various assets including Government bonds but will not include, although the package has yet to be designed in full. The composition of the package is likely to be dictated by economic data. This caused a dovish reversal of the move where most traders and market participants interpreted the lack of commitment to Quantitative Easing as hawkish. This saw European bourses reverse much of their losses instigated by the hawkishness of the Governing Council’s view and the Bund reverse a large portion of the down move. The EURUSD has also retraced the hawkish push to the upside and now resides just below the 50% Fibonacci level of yesterday’s range. This morning we also saw German Factory Orders improve, reading 2.5% against the expected 0.5%, allowing the DAX to push higher, fuelled by good data and the source commentary last night.

Today’s View

Today we have a swathe of US data releases in the form of US employment numbers. The headline Non-Farm Payrolls is expected 230k with the Unemployment rate at 5.80%. As employment is one of the primary indicators, alongside housing numbers, this will be one of the most important numbers of the month. Initial jobless printed lower yesterday and ADP Employment read above 200k on Wednesday; it is likely that Non-Farm Payrolls today are to be ahead of the 200k handle but not wildly outside of expectations. We are currently at a 14 year high for average annual Non-Farms and we are slowly seeing the slack in the labour market recede. Although initially the quality of the jobs being created was called into question we are seeing the ratio of full-time to part-time work improve. The slack is being eaten up “faster than originally anticipated” which also allows a bit more hawkish rhetoric through the door. We also see US Durable goods revisions and Factory orders this afternoon, with Factory orders expected at 0% for October. The subcomponents of employment readings will be highly important as these are what will determine the qualitative aspect of the Non-farms reading. Average hours worked should be higher to see slack reduce in the labour market.

Alternative View

With all focus on the Payrolls figure we recommend traders plan contingency trades should numbers surprise. Preparation is key on large releases such as those we’ve seen this week. We also highlight that the Amplify Strategy assumes numbers are in-line or are likely to follow our fundamental view.