The GIGO jobs report
This is undoubtedly the most distorted jobs report in living memory. Scroll down a bit, and you get to a whole box entitled “Partial Federal Government Shutdown”, which explains that for a multitude of reasons, the amount of “nonsampling error” in this report is going to be much bigger than it normally is — and yet, the BLS also made the correct decision that for the sake of “data integrity”, it was not going to try to correct for any of those nonsampling errors.
The markets, however, are hard-wired to take the payrolls report seriously, especially right now. We had a very strong GDP report yesterday, which was itself subject to all the same errors and omissions, and there’s something more generally febrile about the broader atmosphere: yesterday alone saw an unexpected rate cut in Europe, as well as a decidedly frothy first-day valuation for Twitter. On top of all that, we’re still in the very heart of good-news-is-bad-news territory, where traders only care about when the famous Taper will begin. The stronger the data, the more worried they become, and the more that stocks and bonds sell off.
Put it all together, and you have a recipe for volatility. News organizations have a largely unspoken rule of thumb that the bigger the market move, the more important the news must be; their readers, certainly, have an inexplicably insatiable appetite for stories which try to answer the “why did the markets move so much?” question. But today of all days, the right reaction is to take a deep breath and try not to pay too much attention to any of the numbers coming out of Washington and New York.
For one thing, it’s possible (anything’s possible) that, thanks to the strength of this report, Ben Bernanke, at the very end of his final term in office, will decide to kick off the last full week before the Christmas break with a tapering announcement. But it’s not very likely. The report is unreliable, thanks to the shutdown; the timing would be perverse, needlessly constraining his successor’s option space; and, most importantly, the Fed just isn’t seeing the kind of increased inflation which would cause it serious concern. Just this morning, we saw the release of inflation data for personal consumption expenditures — that’s the number the Fed likes to concentrate on most, even more than CPI. And the number came in at just 0.1%. Nothing to worry about there.
So be very wary of anybody saying that in the wake of this morning’s release, markets now “think” that there’s a significantly increased chance of a taper in December, or even January. (Janet Yellen doesn’t take over from Bernanke until the February meeting.) You can try to back out implied probabilities from market prices if you like, but the more volatile the markets, the less informative those implied probabilities will be.
This is a GIGO jobs report: garbage in, garbage out. In fact, its doubly GIGO. The first GIGO is the way in which all those incorrectly-completed questionnaires resulted in much larger, and much less quantifiable, error bars than we normally see in the jobs report. And the second GIGO is the way in which the unreliable jobs report created significant market moves.
So unless you’re a trader working on a time horizon of minutes, it’s best to ignore all of today’s noise, both in the data and in the markets. These things will resolve themselves eventually, but it could easily take until well into 2014 for them to do so.