Market players to be indifferent to Non-Farm Payrolls numbers?

Outlook:

Payrolls today are forecast at 200,000 or 203,000 (Reuters) or 201,000 (Bloomberg), with unemployment the same 5.1% and earnings up 0.2%. Market News gets a range of 185,000 to 225,000. Aug was 173,000 but is always revised and usually upward. Market News notes that yesterday’s weird yield drop to nearly 2% gave the impression “it was like a racehorse just waiting to shoot out of the gate at the slightest whiff of a weaker-than-expected jobs re-port.” It doesn’t help that the East Coast is about to get a hurricane.

Ah ,but what is “weaker”? First is the monthly average, down around 200,000 from the year-to-date av-erage of 247,000. This means deceleration as the “cycle” matures. Then there are seasonals, like the public sector getting a boost in September as teachers return to work. You’d think they could adjust this out by now, wouldn’t you?

Many players plan to be indifferent to the numbers, with Fed funds futures pricing in only an 18% prob-ability of an Oct hike (from 45.6% a month ago), according to the FT, and only 44.2% in Dec. As noted by many, however, Fed funds futures are a lousy predictor of actual Fed actions, so we look at this infor-mation with a jaundiced eye. Maybe more reliable is the 2-year yield, but there, too, we see a fixed in-come market not convinced of any hike at all. The yield is now about 0.66%, from 0.82% two weeks ago. Bloomberg reports the spread between regular Treasuries and TIPS has contracted from 1.97% in April to 1.46%.

Analysts struggle to justify the Yellen promise of a hike from amidst the labor market data. The interest-ing tidbit is average hourly earnings at 0.2%. This is the same as recent months but through the magic of statistics, would constitute a 2.4% rise on the year-over-year basis. This would be the highest since Aug 2009. The year-to-date through Aug is 2.2%, though, and a single month with a higher year-over-year may not be too impressive. An important house (Wrightson) see weaker average hourly earnings at only +0.1%, due to negative calendar effects. That still brings the average hourly earnings to 2.3% y/y, higher than before.

Also unimpressive is the change in involuntary part-time workers—those who would prefer a full-time job. The group has shrunk 19% since Jan 2009 but was a whopping 6.5 million persons in Aug, or 40% over the pre-recession level. So how can wages rise when there are so many job-seekers? The solution is obvious—a tax on a high ratio of part-time to full-time or a tax break for rising full-time jobs, but get-ting those morons in Congress to do anything on taxes except cut them for the rich is a fruitless under-taking.

Also contributing to a sense of gloom is a cut in Q3 GDP forecasts by JP Morgan, from 2.0% to 1.5%. And the Atlanta Fed's Q3 GDPnow forecast was revised down to 0.9% from 1.8%.

With forecasts of a bad quarter and yields falling, how can we possibly be expecting a rate hike? It’s a battle between the traders and the economists, who persist in yield at 2.43% at year-end, according to Bloomberg.

We have disconnects all over the place. Market prices do not line up with economic data. The market is at odds with the Fed. The emphasis on the jobs reports is just plain wrong. The data is among the worst we ever get and always revised, and it’s ridiculous for so much money to depend on such bad numbers. As usual, analysts say that if we get the low end (185,000 or fewer), the prospect of a hike goes out the window. Well, it looks like it’s out the window already. We guess that a low number, or a low earnings number, will trash the dollar. At the same time, a high number (225,000-250,000) will not necessarily inspire the bond gang to lift rates on Fed hike hopes. As we say in economics, bah. This puts the proba-bility of a lasting dollar rally well under 40%.