Forex Institutional Research: UBS NFP Preview
Key quotes from the UBS NFP Preview report:
April nonfarm payrolls meet the grind toward lower yields
We review a potential response of Treasury yields to April payrolls. Our yield beta regression model – based on the headline NFP miss/beat vs. consensus, prior month’s revision, and the earnings surprise – estimates that a 100k in combined payroll surprise and revision should result in 3bp yield change in the 2y, 5bp in the 5y, and about 4bp in the 10y. Additionally, 0.1% surprise in AHE should move yields by about 2bp in the 2y and 5y, and by 1bp in the 10y. While the model has generally retained its predictive power, judging by generally steady, solid R2s, the betas have declined slightly in recent months as the Fed has become more accommodative and markets have continued to price-in low odds of a hike in the near term. AHE remains the important data point, given its significance for inflation. UBS projects a 200k rise in NFP payrolls and 0.3% gain in AHE, in line with market consensus. Following a steady decline in yields over the last 2 weeks amid rather low volatility, we expect an asymmetric response, a larger selloff on a strong positive surprise against a muted reaction to a miss. However, a small deviation from estimates is unlikely to be material.
Reliability and historical performance.
The yield beta model based on three inputs, payrolls surprise and revisions as well as the average hourly earnings surprise, has continued to show good fit over the last year, as evidenced by high R2s, particularly for 2yr and 5yr yields. R2s for regression models that do not include AHE are lower. Model projections were accurate in April and February (Figure 2). They missed in March, when yields kept recovering from very low February levels. The slight recent deterioration in R2s can be attributed to the sharp risk-off and risk-on in early 2016, or when a combination of a miss and revision was small and thus inconclusive. Otherwise, the direction and magnitude of predicted and actual yield changes had tended to be correct.
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