Payrolls, the peskiest of all releases

Outlook:

Today we barely have time to finish licking our wounds from the Draghi disappointment before payrolls will be upon us. As in the Draghi case, the FX market outcome hinges on the variance between expectations and actuals.

Draghi is thought to be surprised by the abrupt and outsized rise in the euro, but his staff should have warned him. If you say “whatever it takes” and you know the market thinks that means an increase in monthly purchases but you don’t do that increase, you are responsible for the gap between expectations and actual. Many analysts feel Draghi overpromised. His assertion that reinvestment of maturing issues is a powerful factor was not believed. Maybe it’s powerful but it doesn’t substitute for an increase in the monthly nut. We expected some deep analysis of this issue by the end of the day yesterday, but never found it. Maybe Draghi was overestimating the instant-read capabilities of his audience.

It’s not as though Saint Mario has lost his halo, but it’s certainly tarnished. This is doubly so because the economic forecasts were roughly the same as before. Draghi’s repeated statement that QE is working and a successful program also fell on deaf ears. Aside from the ECB not increasing the monthly purchases, hardly anything else has changed—the divergent policy thesis remains in place. The euro breakout looks like an overreaction, but we are wary of the move continuing to overshoot once payrolls is out of the way.

We confess that numerous indicators were pointing to this outcome the day before. It was one of the occasions when we allowed interpretation of fundamentals to overrule the technicals. But the amount of crow we have to eat is pretty small, because in trading our Contingency Rule kicked in as it is supposed to and we ended the day a net winner, just not as big a winner as if we had the direction right in the first place.

Payrolls is the peskiest of all releases—the most important for setting sentiment on the health of the economy and also imputed policy sentiment at the Fed. It’s far too much weight for such a lousy num-ber. The shortcomings of the measure are well known—it gets revised by a lot, it’s not representative, the enterprise version of the unemployment rate clashes with the household version, and some 17 other problems. This time we have an ADP forecast of the private sector component at 217,000, more than the consensus of economists on the overall private plus public sectors at 200,000. Nobody much bothers to investigate this discrepancy anymore (it implies a drop in public sector jobs).

For the record, the Nov estimate of 200,000 compares to 217,000 last time, a blockbuster surprise at the time. The year-to-date average is 206,000. The 6-month average is 215,000. The important number is actually hourly earnings, up 0.4% in Oct but expected lower this time, probably back to the average so far this year around 0.2%.

As always, the market will have a knee-jerk reaction to the actual vs. the forecast. If the headline number comes in at the expected 200,000 or near it, the dollar will not benefit. If it’s vastly lower, like 150,000 or less, the dollar falls. Only if we get another blockbuster number far over 200,000, like 230,000, does the dollar have a chance to get a substantial pullback on yesterday’s breakout.

It may not be enough. For one thing, the Fed has been a bad communicator and while we think it can’t withdraw now, it can withdraw now. Failure to deliver the hike at the next meeting (Dec 15-16) would be massively dollar-negative. It would mean the economy is not strong enough to take it or it means the Fed is too chicken to take the chance, or both. We are still a little worried that the glass half-empty crowd may have a point—after all, the last ISM manufacturing index was under the boom-bust line. Manufacturing is only 12% of GDP but the Fed has never raised rates on a sub-50 ISM, or so say the gloomsters at CNBC.

Note that Canada reports Nov jobs this morning, too. Poor Canada! It never gets any traction when all the noise is about the US number. In Oct, Canada had a nice gain (10,000) but it’s expected softer this time.

Draghi speaks at the NY Economic Club today and we may get some interesting comments. But it’s unlikely he can say anything to change the inconvenient fact that the euro put in a key reversal. Key reversals—open below the low the day before but new close far, far higher—are pretty reliable. A ket reversal points to a lasting rally.

Unless payrolls is stupdendously good or Draghi can roll back the new pro-euro sentiment, we have to expect a serious euro improvement. To name a level would be guessing, but 1.10001.1150 seems reasonable and possibly more. But beware! The divergent policy theory has not actually gone away. Euro bears will still be lurking in the shrubbery waiting for new highs to sell.