As we argued last month in Labour market data worse than meets the eye, we were not impressed by the latest release of labour market data on Friday 2 October. The reason for our curmudgeonly lack of appreciation of the figures was the drop in Weekly Hours and especially the drop in the Participation rate.

When Americans are no longer searching for a job, they drop out of the Participation Rate (graph above). In other words, when the Participation Rate drops, the Unemployment Rate drops too (everything else equal). The past few years, the Participation Rate has begun a structural shift because of retiring baby boomers, but the drop in the past 12 months (-0.9% points) is nonetheless a historical record only seen twice before in the past 577 months.

Last month (September) the Unemployment Rate increased 0.1% DESPITE the fact that the Participation Rate dropped 0.3% points. Since the Participation Rate is noisy on a MoM basis, there is a very high likelihood that it will increase to 65.3 or even 65.4 % from the current 65.2%. That would in itself result in an increase in the Unemployment Rate from 9.8% to 9.9% or 10.0%, but since Nonfarm Payrolls are still quite negative and since Initial Jobless Claims and Continuing Claims show a continued deterioration (although at a slowing pace) of the US labour market, we could actually easily have an Unemployment Rate above 10% tomorrow.

Tactical Portfolio Implication: Reduce long exposure ahead of the figures tomorrow and re-enter longs at a dip induced by the coming disappointment. We recommend to buy S&P 500 at a dip towards 1028 with a 5-point stop.