Granted, by the time most of you read this, NFP will already be out, but I’m not as interested in the initial reaction as I am in how things play out over the rest of the day. It’s not until the afternoon (and arguably, even until next week) that we’ll be able to tell which sort of NFP reaction we’re seeing. Here are the five eventualities:
1. NFP beats the forecast and bonds sell-off. This is one of the several ‘straightforward’ responses. It would let us know that markets are still putting stock in the employment data as an indicator of Fed policy action. This isn’t my favorite because the Fed has all but said that it’s inflation and global economic concerns keeping them from hiking. They’re arguably well above the proverbial bar on labor markets when it comes to rate hike justification.
2. NFP misses and bonds rally. This is also a straightforward result. I wouldn’t have as much of a problem with this ‘deserving’ to be a market mover because excessive weakness in labor markets would, indeed, be something other than a status quo. In other words, the Fed is focused on inflation and global growth concerns because jobs have been strong. But if it looks like jobs are taking a turn for the worse, it would make sense for them to care.
3. NFP is close to consensus and markets don’t do much. This is the third and final straightforward result. It’s pretty much the neutral middle ground between the first two eventualities. Not very interesting…
4. NFP is either close to consensus or weaker and bonds still sell off. This would be the first of two paradoxical results. Depending on the pace of the sell-off, it would let us know that traders were simply predisposed sell bonds at current levels, but some may have been waiting for lower yield targets that could be made possible by weak NFP.
5. NFP is either close to consensus or stronger and bonds still rally. Opposite of number 4. Traders were predisposed to buy bonds and were waiting for a better entry point that could be provided by stronger NFP.
Wild Card: NFP beats or misses big, and bonds still end near unchanged. This would simply be like a lighter version of options 1 and 2 (where markets move counterintuitively). Either eventuality would suggest relatively light focus on labor markets and more focus on the trading range and other economic variables.