October Payrolls roar set to back to life

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: