Forecasting Folly: If you’ve followed us here at Hedgeye for any period of time, you already know that we don’t pretend to have any edge on the monthly non-farm payrolls figure. That shouldn’t come as a surprise. While myriad market pretenders toss out their predictions, no real pro or analyst will.
Incidentally, what really matters is non-seasonally adjusted rolling US Jobless Claims.
The BLS and ADP figures are certainly co-integrated on a multi-month basis and the trend in the initial claims and other higher frequency employment data can offer some probability weighted, directional insight and some fertile fodder for the tea leafers, but predictive value on a month to month basis is notoriously poor.
It’s not the number itself, but the markets reaction to it that drives our subsequent allocations.
Summary Take: In short, +74,000 was obviously a disappointment vs. prevailing expectations and an outlier verses the balance of higher frequency labor market data. We wouldn't dismiss today's data outright, but we wouldn't materially shift our positioning on one outlier print.
With 273K people out of work due to bad weather (vs. an average of 166K over the prior 5 December’s) weather is being held out as the biggest distortive factor. With our retail and restaurant analysts (who rarely cite weather as a discrete swing factor) citing weather as a drag on traffic also, we'll assume the unusually inclement weather likely did, indeed, have some impact on construction and transports/trade employment and drag on hours worked.
Strategy: The unsurprising price response to today’s jobs data is down dollar/down bonds as “no-taper” expectations get priced in at the margin. (We outlined how to play a breakdown in the dollar in our 1Q14 macro themes call yesterday.) While we'll monitor the dollar weakness closely, in regards to the more immediate term and today’s employment data specifically, we’ll take the other side of overbought/oversold moves in today’s price action.
In the context of the broader labor market data, where the preponderance of evidence remains positive with ADP, initial claims, ISM manufacturing and ISM services all reflecting moderate, ongoing improvement, the BLS data sits as a single negative outlier.
Unless we see confirming fundamental evidence alongside a shift in risk management signals (across SPX, VIX, DXY, 10Y Treasury), we’re unlikely to pivot on our generally positive view of the domestic labor market because of today’s data in isolation – particularly given the positive revision, the weather caveat and the ongoing, significant seasonal distortion.