Macro Wrap – Momentous Payrolls Friday

by Enis February 7, 2014 6:43 am • Commentary

Once again, today is Payrolls Friday.  Today’s jobs data is the most important monthly economic data point.  Even more so these days, since the all-powerful Federal Reserve committee has pinpointed jobs as the leading consideration for monetary policy.

Many have deemed the focus on the monthly jobs data as downright silly.  It’s a lagging economic indicator that is heavily revised after the fact, and affected by one-off events (like the weather) that can throw off the data and lead to the wrong signal about the true state of the economy.

However, preparing, speculating, and acting upon the monthly Payrolls Report is a bit like watching the latest TV hit so that you’re not left out of the side conversations.  You really couldn’t care less what happens next season in Breaking Bad, but then you’d be twiddling your thumbs while the conversation gains gusto around you.

Global financial asset prices are going to move based on today’s report, whether you or I or anyone else thinks that is reasonable or not.  Hence the collective focus.  Lately, the reactions to U.S. economic data have been simple risk-on if the data is good, and risk-off if the data is bad.  Fed speakers this week reiterated the very high bar for stopping the taper, nicely summed up by Tim Duy.  Add the recent weak macro data, and the market has become more focused on growth fears than monetary stimulus.

For example, Monday’s ISM manufacturing report was a dud, so stocks sold off hard, Treasuries rallied, the U.S. dollar sold off, precious metals rallied, and implied volatility increased.  If today’s report is worse than expected, I expect similar one-day reactions.  If today’s report is better than expected, I expect the opposite reactions.

Putting aside the short-term reaction though, the long-term chart of monthly payrolls data adds some credence to the market’s focus.  Over the last 20 years, payrolls growth has generally been positive during economic expansions, and has generally been negative during recessions:

U.S. Non-Farm Payrolls, Courtesy of Bloomberg
U.S. Non-Farm Payrolls, Courtesy of Bloomberg

The long-term historical data is clear – better payrolls growth corresponds to better economic growth.  One month’s data is worth little on its own, but the overall trend of that data is indeed quite noteworthy.

Personally, I still couldn’t care less about Breaking Bad.