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Payrolls Pro Tip: Don't Overreact to Rounding Errors

The reaction to today's nonfarm payrolls report will likely amount to market noise

Dec 5, 2014 at 8:49 AM
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Welcome to the (close) of the working week! We get to celebrate Friday with our monthly jobs report today. It's probably already out by the time you read this. I'm going predict it's a rounding error away from the estimate of 230,000 jobs.

By "rounding error," I mean 0.1% of the total employment in the U.S. I believe that number is 140 million-ish, so I bet we land somewhere between 90,000 and 370,000 jobs. [Ed. note: We added 321,000.] I also bet someone, somewhere makes a big deal if we're +/- 20,000 off the estimate -- which I always find absolutely insane. Now, we're talking 0.01% away. And remember, these numbers themselves are just estimates with margins of errors in their calculations. Remember that whole debate over the Birth/Death Model? Seasonality? Holiday hiring and firing patterns change over time as the nature of holiday shopping itself changes. There's about a 0% chance seasonality models account for that.

Oh, and the estimates get revised a month later, anyway. So we're not exactly talking gospel here in this number.

But, whatever. Ours is not to question why. Rather, ours is to try to profit at the expense of others asking the wrong questions and/or divining the wrong answers.

Options do price in something of a move tomorrow. We can analyze this the same way we analyze a stock ahead of an earnings reaction. If there's an unusual volatility bid-up in nearer options, it suggests that the market anticipates an upcoming gap.

And my trading system does pick up an "overbid" in SPDR S&P 500 ETF Trust (SPY) options. It suggests SPY is pricing in about a 0.80 move tomorrow, presumably a gap. So if you're scoring at home, that's a 0.4% move! Wahoo!

That sounds about par for the course heading into the jobs number. We're always told this is THE big number, but I'm not sure the buzz around this one is particularly high. I'm not even sure what to root for. If we blow out to the upside, the market could get slammed. Yellen might raise interest rates a couple weeks early or something. On the other hand, we might tank on a horrible number, as well. The economy is imploding! Or, at least it was a month ago.

I think the best bet is that the move in progress before the number comes out probably resumes. And the reaction to the actual number turns into a few minutes of noise signifying not a whole lot.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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