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It’s “Non-Farms Friday” again tomorrow when we get the latest update on the US employment situation. This is one of the most important of all data releases as the payroll number gives an indication of the employment situation in the world’s most important economy.  Maximising employment, along with maintaining stable prices, is the Federal Reserve’s dual mandate. The US central bank is also charged with ensuring moderate long-term interest rates, but that’s open to some interpretation. Of course, the notion of “full employment” or the “natural rate of unemployment” is also open to interpretation but is generally thought to be somewhere between 4.7% and 5.8%. Last month the Unemployment Rate ticked up to 5.0% from 4.9%. So by this measure the US could be said to be enjoying full employment. However, delving behind the headline we can see that there has been a marked shift away from well-paid permanent jobs (such as in shale oil) to poorer paying jobs in the service sector and elsewhere. In addition, it’s possible that the Unemployment Rate could start to pick up now as previously discouraged job seekers come back into the market and are counted as unemployed once again. This is a positive development, but it may also provide another excuse for the Fed to hold off from hiking rates despite both unemployment and inflation being within or close to their respective targets.

Yesterday we saw the release of the latest ADP Non-Farm Employment change. This is a private survey designed to mimic the government’s data which is published two days later. Investors view the ADP data as a “heads-up” ahead of the official Non-Farm Payroll report. It certainly is effective in measuring the overall trend in the data, but it can be patchy on a month-by-month basis. This is because the government’s number tends to be considerably more volatile, and of course it is this volatility that traders look for and react to.

This being the case, yesterday’s release was a bit of shocker. There was an increase of 156,000 jobs in April, miles below both the 205,000 consensus expectation and last month’s 200,000 gain. The fact that yesterday’s release was so far away from trend will have traders scratching their heads. Now this could turn out to be a piece of rogue data, but if history is anything to go by it doesn’t bode well for tomorrow’s payrolls.

The consensus expectation is for an increase of just over 200,000. But the ADP data together with today’s jump in Jobless Claims and the Challenger Job-Cut number will mean a “whisper” somewhat below here. But the big question is how the markets will react if we get a similar miss on Friday?

Yesterday the dollar sold off sharply straight after the release as the poor data was interpreted as reducing the likelihood of a US rate hike next month. But this move reversed quickly. It may be positive for risk assets for the Fed to hold off from hiking rates (as this number suggests it might), but it sends a grim message about the state of the US economy.

It’s also worth noting that other US economic data releases have been tepid of late. Some analysts may be quick to blame the Fed’s rate hike back in December. However, key metrics such as Manufacturing and Non-Manufacturing PMIs have been trending down for over two years now. In fact, a number of commentators warned that the US central bank would be mad to raise rates as manufacturing declined. However, the Fed painted itself into a corner last year, arguably waiting too long to raise rates (March and June were possible dates) although who knows how they would have reacted to last summer’s China-triggered market melt-down.

We’re in an odd situation now. The markets don’t expect the Fed to raise rates at next month’s FOMC meeting. Yet a number of Fed members have been anxious to keep the prospect of a June hike on the cards. If we accept Fed comments as typical central banker behaviour – to jawbone rather than take action – then we can ignore what they say. If that is the case then poor economic data releases won’t change this. In other words, weak data doesn’t of itself make a rate hike less likely, because we shouldn’t expect one in any case. So there’s no upside to weak data anymore – bad is no longer good. Poor data is just that – an indication that all is not well with the US economy. This shouldn’t come as a surprise to anyone who’s seen the latest GDP data, or followed corporate earnings over the last three quarters. So my take is that risk assets (particularly equities) could struggle to make significant gains until sentiment turns so negative that the Fed starts whispering about further monetary stimulus, rather than shouting about rate hikes.


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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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