MBS Live Day Ahead: Does NFP Matter?

On average, NFP (the "nonfarm payrolls" component of the Employment Situation report which also refers to the broader report itself) is the biggest market mover in the history of the world in terms of economic reports.  It generally doesn't go too far out of style until it starts saying the same thing repeatedly.  In several ways, now is one of those times, sort of...

Payroll counts have been been relatively flat in solid growth territory for more than 6 years now.  This can be seen in a 4-month moving average of Private Payrolls (less volatile than nonfarm payrolls because the latter includes periodic mega-distortions from Census hiring) in the orange line in the following chart (the blue line is Private Payrolls themselves).  In general, it's held between 140k and 240k.  That's about as high a range as we tend to see and 6+ years is about as long as it gets.

In other words, labor market metrics have told us the same story for years now.  If they continue to tell the same story, it doesn't really give bond markets new and actionable information.  

Last month's Payroll counts fell through the floor, but economists figure that's a one-off due to temporary factors and we'll see a bounce back in today's numbers.  Even if we do, you can likely see in the chart that the general trend has been moving slightly lower over the past 2 years (look at the gradual descent in the orange line above).  If payroll counts continue to slide, they'd need to be accompanied by an ongoing drop in the unemployment rate and an ongoing improvement in average hourly earnings or else they'd be saying something negative about the labor market (with lower unemployment and higher earnings, a slump in payrolls merely means the last remnants of labor market slack are finally tightening up).

Whatever the case, NFP will continue to serve as important tactical landmark for traders regardless of its economic relevance.  It just has too much historical street cred.  Traders wait for it as a jumping off point for shifts in trading patterns.  They wait to see how other traders will react and have planned accordingly for several potential outcomes.  All this will continue to occur even if the tenor of the report doesn't continue lining up with the expected market reaction.  With yields hovering right near the middle Bollinger Band (a relatively neutral place to be in terms of momentum), even an NFP that doesn't matter might be enough for a breakout.