Payrolls preview

Payrolls preview

The markets are gearing up for the November US labour market later this afternoon. Analysts expect a 220k increase in non-farm payrolls for November, up from 12k in October. The unemployment rate is expected to remain steady at 4.1%, and average hourly earnings are expected to moderate a notch to 3.9% YoY.

A pivotal payrolls report could trigger major market reaction

The average monthly increase in payrolls so far this year is 170k, so November’s figure is expected to be above average. Financial markets are also sensitive to economic data. The average move in the S&P 500 in the 30 mins after a payrolls release is 0.11% so far this year, the upper bound is 0.4% and the lower bound is -0.18%. Thus, the bias in the US stock market has been to the upside after a payrolls release. The Russell 2000 is even more sensitive to the payrolls release. The average move higher in the Russell 2000 in the 30 minutes after a payroll report is 0.2%, the upper bound is 0.65% and the lower bound is -0.2%.

This week’s payrolls report is particularly important as it comes ahead of the Fed meeting on 18^th December. The market is pricing in a 68% chance of a rate cut from the Fed later this month, however, it could be scaled back if we see a stronger than expected payrolls report. The highest payrolls figure so far this year was 310k in March, however, we think that a reading over 250k could lead to some hesitation in the market about a December rate cut from the Fed.

French stock market recovery led by stocks with limited domestic exposure

Elsewhere, French assets are in recovery mode on Friday. The Cac 40 is the best performer in the European stock market so far on. It is higher by 1.2%, and French luxury names are leading to the recovery. Hopes of a Chinese stimulus package that focuses on the consumer are building, as Beijing officials meets to discuss 2025 growth targets. Added to this, French luxury names are less impacted by domestic political travails as most of their sales are generated overseas. They are likely to be more impacted by Donald Trump winning the US election than by whatever happens to President Macron. Overall, a technocratic government is on the cards, the fiscal can has been kicked down the road and although forging a new budget is a tough endeavor, the organs of French government can roll over the 2024 budget month on month in 2025, and there is no chance of a US-style government shut down.

French bonds in recovery mode

The French – German yield spread has narrowed further since the Barnier government has fallen, and it now stands at 74bps. This comes after Marine Le Pen made conciliatory remarks in an interview about President Macron, saying that it was not for her to tell him to resign. She also spoke out on the economy and the need to reign in the deficit without tax rises, in a move that suggests the economy could become a central plank of her campaign message if there are elections next year. In the past the economy has been missing from her rhetoric.

What goes up, must come down

The euro has given back some earlier gains as the dollar and the pound leads the G10 FX space ahead of the payrolls data, suggesting that political risk could dent the long-term recovery prospects of the single currency. What goes up must come down, and Bitcoin is down $900 on Friday and is below the $100,000 level. It has fallen by 5% in the past 24 hours, highlighting how risky and unpredictable crypto can be. The decline in bitcoin follows the decline in the Nasdaq on Thursday and declines across the commodity space so far this morning, although gold is managing to eke out a small gain today.