With US payroll data out later today, it is worth reading John Authers's piece in today's Financial Times, which bemoans "absurdities such as the regular wild overreactions to US employment data":
It normally falls to columns like this to inveigh against absurdities such as the regular wild overreactions to US employment data. But in this case, Tim Bond of Barclays Capital in London has done a fine job himself in a research note.
According to Mr Bond: “This writer has always suspected that the bond market’s concentration on the payrolls number had very little to do with the economic import and a good deal to do with an endemic gambling dependency. Rather like roulette, the payrolls number is more or less random, but within a reasonably well-defined range. The economics profession sets the range for the roulette wheel and the random-number generation techniques of the Bureau of Labor Statistics do the rest.”
He suggests that last month’s astonishing upward revision in the ranks of the employed by 810,000, should prompt the market to “abandon its monthly genuflection before the payrolls data”. Or, it can “abandon any pretence to being an efficient discounting mechanism for economic conditions”.
So far, so intemperate. The criticism is justified. Payrolls are treated as a huge market event, but the statistics are frequently incorrect when first reported. With the Federal Reserve on pause, the bond market has made extreme reactions to several other data releases this year, only to correct itself later. This matters, as treasury yields set the baseline for the world financial system.
Today’s data look important. The bet is back on that the economy is slowing, after some disquieting economic releases this week, and that hence the Fed will soon cut rates. Mr Bond disagrees, saying the unemployment rate, at 4.6 per cent, is too low for inflation to head back to the Fed’s “comfort zone”. This unemployment rate, he says, is more reliable than the payroll data, as it is compiled by surveys of households, rather than of companies.
If the market still trades off the payroll number, he says, “then bussing in grannies for a monthly Bingo-Friday would be the more optimal way to allocate capital in the global bond market”.