In the Conference Board survey, the comparison between the difficulty of finding jobs and the abundance of available jobs displayed a significant drop of two standard deviations month over month in the labor market during August. This drop aligns closely with the shortfall observed in the Non-Farm Payrolls (NFP). When I engage in modeling exercises like this, my primary focus is on addressing the NFP shortfall rather than the specific numerical value.

Furthermore, if we examine data dating back to 1998 and analyze the fluctuations in the Conference Board's job indexes in relation to the NFP deficits, the trend has persist since then.

This month, we find ourselves firmly situated within the first quintile. The consistent downward trend from the lowest to the highest quintile is a positive indicator that this outcome is not a random occurrence. It likely signifies that the job-related elements contain valuable insights that are not captured in economist surveys. This discrepancy arises because these components are made public just a few days prior to the release of the Non-Farm Payrolls (NFP) report, preventing them from being integrated into forecast models.

Turning our attention to the ISM employment, it's worth noting that these indexes should ideally be considered in economist forecasts, yet they often seem to be overlooked. Applying the same analytical approach to this data yields slightly less smooth results. This discrepancy can be attributed to the fact that we are comparing the changes in ISM job components from the previous month to the current month's NFP figures, utilizing data that is one month old. Nevertheless, it is evident that declines in ISM employment frequently foreshadow weaker NFP outcomes.

NFP Revisions: Another crucial factor to consider is the trend in Non-Farm Payrolls (NFP) revisions over the past six reporting periods, which has consistently shown downward adjustments. The momentum in revisions is closely correlated with actual employment trends. When the total 6-month revisions dip below -200 and when revisions remain negative for six consecutive months, NFP outperforms expectations only 42% of the time. In contrast, when analyzing data from 1998 to 2023, NFP exceeded expectations 48% of the time. While not a dramatic shift, this pattern offers another piece of the puzzle that may impact NFP outcomes.

Trading Strategy: In light of this probabilistic analysis, it appears to resemble a 60/40 bet with favorable risk-reward characteristics and a positive expected value (EV). A "normalization" or Goldilocks scenario in NFP figures should alleviate concerns about rising yields and potentially boost oversold currencies, such as the Australian Dollar (AUD).

A straightforward approach to capitalize on this assessment is to long AUD, priced at approximately 10 pips above the 0.6435 spot rate. I'm incorporating this into my current positions, despite already holding an AUD spot position. This decision is reinforced by the recent sustained strength in gold prices and my expectation that the significant triangle formation in copper will resolve to the upside.

LONG ON AUD

Sep 05 2023

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