Friday's Payrolls will be fairly tame

Outlook:

Everyone is hoping for some drama from Mr. Draghi’s press conference (after we publish this Briefing) but cool heads warn we will be disappointed. Draghi will probably hint at QE to come early next year, but without naming specifics, let alone amounts and dates. What is the patience quotient of all those traders who bought European sovereign paper (Spanish yield still under 2%)?

The FT names four things to watch for. First is the strength of Draghi’s comments. “Among the possible options would be for the ECB to strengthen its “expectation” to swell its balance sheet by €1tn. Or it could offer some guidance on the pace at which it expects the expansion to happen.” Second is the staff forecasts for growth and inflation, which the FT claims is more independent of policy makers than at the Fed or BoE. Third is any reference to “fine-tuning” the upcoming TLTRO (targeted longer-term refinancing operation). It was dismal at the first foray in September. But it’s actually central, since it reflects ability and willingness of banks to lend. And fourth, what will Draghi say about structural reform? Draghi and Merkel both would like to see the equivalent of the Stability Pact for structural reform. It would include things like fiscal rules and even social-related things like labor market laws.

Longer-run, this could be a Very Big Factor, but probably not today. Today we want to hear about sovereign QE. Anything else is peripheral, at least to the FX market. Whatever Draghi says, we need to prepare for the euro to go in either direction. It can go down because yields will be falling more. It can go up because QE is deferred or because of faith that it will work—take your pick. Or it can go sideways as traders can’t make up their minds. Rangy trading is probably the most likely outcome, assuming Draghi’s hints are vague.

It’s actually a little surprising that traders have been adding to shorts this week, implying they expect Draghi to “fail” to announce sovereign QE. Or are they suckering us into a short squeeze? To take it another step, what if we get a short-squeeze and afterwards, a resumption of sell-on-the-rally? We would not be surprised to see a rally to around 1.2390, the last flat spot and a 50% retracement of the latest move on the hourly chart (from 11/26).

And then on to today’s jobless claims, expected to dip back below 300,000 (after last week’s surprise 313,000). Friday’s payrolls is always a catalyst. ADP estimates the private sector added 208,000 jobs in November, lower than most other forecasts and down from 233,000 in Oct (revised). The WSJ, for example, has a forecast of 230,000 and Market News, 235,000. In contrast to ADP, the Beige Book sets the stage for a pretty good payrolls report tomorrow. It’s fairly upbeat and optimistic, noting hiring across all sectors and even a shortage of skilled workers in some regions. Inflation is going to stay below the 2% target, due mostly to falling oil prices. Despite gains in new job creation, average wages continue to stagnate and will be up only 0.2% m/m in Nov. So, bottom line, payrolls will be fairly tame and shouldn’t have a disruptive effect, but you can never count of it. We usually get at least one spike and often two. We always recommend that traders get out and stay out for the duration of this one release, because prices overshoot stops and targets, and brokers love to nail the retail trader. It’s just not worth it to be right but lose on the trade anyway.