UBS Expects The Unemployment Rate To Drop To A Level That Could Spook The Markets

The unemployment rate will fall to 7.0% come Friday's jobs report, UBS' Drew Matus predicts.

"After reviewing our estimate, we have revised up our forecast for November payrolls to 190k from 160k," Matus wrote clients. "We maintain our earlier estimate of an unemployment rate decline to 7.0% from 7.3%."

This morning, we saw a huge boost in ADP's estimate of private payrolls (215,000), but Matus says that the report wasn't his firm's motivation to up its forecast. From the note:

Retail payrolls likely rose faster than they have been...retail employment expansion [is] similar to last years. Last year, stronger hiring plans preceded a surge in retail hiring from 14k per month on average in Q3 to 43k per month on average in Q4. Last month already suggested some pickup (to 44k in Oct from 22k in Sep and 34k per month in Q3), and we allow for some further acceleration in November.

7.0% would likely be seen as a major milestone for the unemployment rate. Perhaps it would even spook markets, since anything closer to the Fed's 6.5% target might jolt people into thinking the central bank is approaching the decision to raise interest rates.

A strong print on Friday would certainly lead many to speculate that the Fed will taper its asset purchasing program this year rather than next.

Keep an eye on Friday's jobs report. It's going to be a big one.