By Brian Dolan, Head Market Strategist It’s That Time Again
This Friday May 8 will see the release of the April US employment report at 0830EDT. As a critical gauge of the US labor market, the non-farm payrolls (NFP) report is frequently a catalyst for increased market volatility. Against the current backdrop of bonds tanking/interest rates spiking, stocks faltering and the US dollar losing steam rapidly, the NFP impact could be even more unsettling than usual.
Market forecasts are looking for a rebound in NFP after the bleak March numbers. Consensus estimates are for a headline NFP change of +230K (prior +126K) and a dip in the unemployment rate to 5.4% (prior 5.5%). If NFP comes in around those expectations, it would signal a return to levels just below the average NFP gains of the last 12 months (+255K). That would go a long way to soothing market concerns that the US recovery is not falling into a more pronounced slowing. Wage gains will also be closely watched for any signs of improvement in consumers’ spending power. And, of course, watch out for the revisions to the March data.
Today’s ADP Jobs Report Highlights Risks
Most economists are of the view that the March NFP numbers were a one-off, weak reading, and that the US labor market continues to gain ground overall. However, today’s ADP Employment Report clearly highlights the risk that April’s data may disappoint again. The April ADP Employment Change came in at +169K, below expectations of +200K (prior +189K was also revised lower to +175K).
The ADP data has a weak track record of forecasting individual monthly NFP data. (It’s much better on an annual average basis.) Still, the direction of the ADP data suggests another weak NFP report is a distinct possibility.
Markets are currently in the throes of a significant position unwinding, where the most popular trades of the last several months (long US Treasuries, long US dollar, long stocks) are being abandoned in a hurry. Another weak US jobs report could stir that mix up in unexpected ways.
In our view, a NFP report in-line with expectations (+200K-250K) would most likely see those recent moves begin to stabilize. Alternatively, should the jobs data disappoint (<175K), markets could see a much more risk averse reaction as investors re-evaluate the overall outlook for the US economy, and not in a good way. We would look for stocks to weaken, potentially sharply, and US government bonds to recover, sending yields lower as the view of the Fed delaying its first rate hike is cemented. Lower US interest rates would keep the US dollar under pressure, especially as the EUR is recovering on signs of a Greek bailout deal being reached. (Keep an eye out on Greece headlines in case the deal falls through.)
Technicals Suggest Risk of a Deeper Pullback
Stocks globally have been levitating near all-time highs in many cases. Chinese stocks, in particular have had nothing short of a meteoric rally. Over the last several months, dips in stock indexes have been quickly reversed, with prices subsequently grinding back to new highs. However, the technical backdrop on the charts suggests potential for a more significant downturn this time around. (For readers interested in a more thorough technical explanation, please see here.)
Bottom line: Investors should take care on existing long positions, and not be in a rush to re-enter the market (picking bottoms), as a more prolonged decline may be in store. Check back after 9 a.m. on Friday for our view of the April jobs data and market reaction.