With less than 24 hours to go before the next U.S. jobs report, it was finally time for investors to take profits on overstretched equity positions. The fragile U.S. recovery fails to justify heady stock market valuations, and investors now fear that with slower service sector growth, nonfarm payrolls could fall short of expectations. If the labor market is weak, the economy is weak and, therefore, stocks should be trading lower and not higher. Today’s correction in equities led to broad-based risk aversion in currencies. The U.S. dollar sold off against the Japanese Yen and Swiss Franc but traded higher against all high beta currencies with the exception of the euro.
Nonfarm payrolls is traditionally a very market-moving release but in recent months, the impact on currencies has been limited for a variety of reasons. Investors either anticipated a weak number, predicted a recovery or looked past weakness to recoveries ahead. This month, however, we could see a bigger reaction given the misalignment between market expectations and other data, along with worries about the overall economy. Although this morning’s improvement in jobless claims is a tad misleading due to seasonal adjustments related to the pandemic, there are far more arguments in favor of stronger than weaker payrolls this month.
Between July and August, private payrolls doubled in the U.S., there were fewer job losses in the service and manufacturing sectors, jobless claims declined, continuing claims declined and layoffs eased. Confidence was mixed but that’s no surprise given the uptick in new virus cases in July and August. Yet, economists are looking for job growth to slow to 1.35 million from 1.76 million. The unemployment rate is expected to improve but average hourly earnings growth may stagnate. We expect the dollar to have a bigger reaction to a weak number than a strong one. Market sentiment is beginning to turn, the outlook for the economy is uncertain and if data misses, investors will worry that it will deteriorate in the fall. A good number, on the other hand, may not help the dollar or stocks much if they are eyed with skepticism.
Arguments in Favor of Stronger Payrolls
1. ADP Reports 428,000 in Employment Change versus 212,000 prior
2. Challenger reports 116.5% rise in layoffs, down from 576.1%
3. ISM Non-Manufacturing Employment Index rises to 47.9 from 42.1
4. ISM Manufacturing Employment Index rises to 46.4 from 44.3
5. 4-Week Average Jobless Claims drop to 991,000 from 1.39 million
6. Continuing Claims drop to 13.25 million from 15.48 million
Arguments in Favor of Weaker Payrolls
1. Sharp drop in Consumer Confidence index