MBS Day Ahead: How Much Could NFP Miss Forecasts and How Would Markets React?

Nonfarm Payrolls (NFP) is always the biggest potential market mover on any given month in terms of economic reports.  FOMC Announcements, for instance, are not economic reports, and certainly can outshine NFP on occasion, but NFP certainly has more consistent potential.

In other words, NFP is always a contender.  A big beat or miss (of the actual numbers versus the forecast consensus) can always send markets quickly in either direction.  FOMC Announcements, on the other hand, are sometimes inconsequential depending on what even has the chance of being changed with respect to monetary policy.

Just like the $10bln tapering and "some time in 2015" rate hike forecasts aren't likely to change at the next meeting, what new information could NFP give us today that would make for a material change in how markets view upcoming economic conditions?  This is the first report of 2014 that can claim little if any weather-related distortions. 

On the one hand, that means that market participants should take it in stride if the number is much higher than last time.  On the other hand, markets couldn't simply look at the data in the last report and assume another 50k jobs should have been there.  It's one thing to crunch those numbers (which I did HERE).  It's another to trade on a headline that doesn't exist yet.

If those numbers show up today and if nothing else changed from last month, the current forecasts of 200k are at least 25k too low.  It's also worth noting--while we're on the topic of forecasts being off--that this particular instance of NFP has a much wider than normal range of forecasts submitted by economists polled by Reuters.   Even with only average historical beats/misses, a healthy beat today could approach 300k while a similarly healthy miss would be hard pressed to dip below the 129k from the report before last, let alone the 84k that rattled markets in January.

As far as bond markets are concerned, past precedent suggests our next substantial move above the recent range would equate to about 10bps in terms of 10yr Treasuries--so a move from 2.8 to 2.9 basically (white circles in chart below show the historical precedent).  That could happen in minutes or days depending on how big the beat is.  The result of a big miss is less readily suggested as it collides with all the recent pivot points of the past 3-months of range-bound trading.