Thursday, December 6, 2012

Take the "under" in NFP sweepstakes

I hate the Non-Farm Payroll release because the market can react in a violent fashion to what is essentially noise. The error term in the NFP release is so enormous that it's meaningless. Nevertheless, we have to deal with this source of volatility.

With Friday's NFP release, we are seeing signs everywhere that employment is weakening. How much of that is Sandy related, I have no idea.

Nevertheless, here is the analysis from Gallup, which produces a daily tracking poll of employment and whose daily poll figures continue to tick down:
Gallup's unemployment results for the 30 days ending on Nov. 15 suggest that the improvement in the U.S. unemployment situation found in October was short-lived. Still, on an unadjusted basis, Gallup's unemployment and underemployment measures over the past two months show what might be expected holiday seasonal improvement. U.S. companies increase hiring for the Christmas holidays at this time of year.
At the same time, superstorm Sandy distorted weekly jobless claims, according to the U.S. Bureau of Labor Statistics, and may be doing the same to Gallup's unemployment results. The presidential election may also have disrupted the job market for a few days in early November.

Taking seasonal factors into account, it appears that the unemployment rate has remained around 8.0% since May. This seems consistent with other general economic data showing the economy growing slowly, the most recent of these being the 0.3% decline in October retail sales.

Looking ahead, Gallup's mid-November unemployment data have generally provided predictive insight into the official BLS numbers. In turn, Gallup's results suggest that in early December, the BLS could report an unchanged seasonally adjusted unemployment rate for November.

The outlook isn't entirely dire, the internals of part-time workers looking for full-time work is unchanged, indicating that the deterioration isn't serious.

The consensus estimate for NFP is 93K as the Street is forecasting a serious drop from the 171K release in October. Given the inherent volatility of NFP day and the uncertainty caused by Sandy, I would stand aside. If you don't have an edge, don't bet.

However, if you put a gun to my head and made me make a forecast, then given the recent indications of weakness in consumer spending I would have to take the "under" bet that it would come in below consensus.    

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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