Markets around the world have stabilised overnight. After a mixed close yesterday, US index futures are trading up marginally while the FTSE is down marginally. Continental indices are up moderately with the Dax rising 0.8%. Italy's FTSE MIB is up 2.4% led by a rebound in its deeply depressed banks which appear to be working on solutions to their financial problems. Crude oil is up 0.7% while gold is down 0.3%. Overall, markets appear to be in a holding pattern ahead of today's big economic figures.
A short but busy week for trading wraps up today with a number of big employment reports that could impact economic, earnings and central bank expectations for weeks to come.
The main event is US nonfarm payrolls with traders and the Fed still unsure about what to expect. Last month’s nonfarm growth was shockingly low at 38K forcing the FOMC to rethink its interest rate hike plans. Last month’s report increasingly looks like an aberration, however, as jobless claims have remained low while ADP payrolls beat the street and came in similar to recent months.
Still the big 6% plunge in WTI crude oil after a 2.2 mmbbl drawdown in DOE inventories came in below expectations after a 6.7 mmbbl drawdown in API inventories yesterday shows that economic indicators don't always align, while last month’s payrolls report indicates indicators can even contradict each other. Overall, I think last month’s report was low and this month am expecting a 175K increase in jobs plus a 50K upward revision to last month.
Even if we do see slow job growth, there are two ways of looking at it. Last month the street and the Fed took slow job to be a sign of a weakening economy. It also, however, can be a sign that the US is nearing full employment. Last month, the US unemployment rate fell to 4.7% which Boston Fed President Rosengren indicated was close to his full employment estimate. Another sign of full employment would be increasing wage pressures. Last month wage growth rose to 2.5% and this month the street is expecting 2.7%. Although the Fed appears to be trying to stall on another rate hike until after the US election and the implications of the Brexit vote become more clear, rising wages could put pressure on the central bank to act sooner.
Currently, USD still appears to be pricing in two rate increases this year, while bonds appear to be pricing in no hikes and stocks have been steady. A report pointing toward a dovish Fed could knock the dollar back while a report pointing toward a hawkish Fed could crush bonds. Stocks may continue to focus on the implications of the job market and a strong economy on the prospects for corporate earnings likely seeing good news as good for earnings and stocks as happened in the initial reaction to today’s US employment figures.
Canada’s employment report is also due Friday morning. Last month an expected impact of the Alberta wildfires didn’t materialize but depending on survey dates it could show up this month. It’s also unclear at this point how or when the positive impact of the return to production and reconstruction may turn up in job figures. As is often the case after a big print (60K last month), I expect to see a retrenchment in full time jobs. Based on all of this, I’m thinking a flat month for Canada jobs below the 5K increase the street is expecting.