Its NFP day tomorrow!!
Historically, the release of US jobs data has been seen as the most important data release of the month, in terms of both its importance in influencing Fed policymaking decision and in terms of its ability to trigger volatility.
In my primer for last months NFP, I noted how the onset of the Covid-19 pandemic initially resulted in the monthly NFP release losing some of its importance; traders preferred weekly jobless claims data, a timelier update on the state of the US jobs market.
However, last month’s historic NFP outcome brought NFP back into the limelight with a bang!
As a recap, we had official jobs data for May at the start of last month. Markets had been expecting the unemployment rate to rise from just under 15% to just under 20%, representing a further 8mln in job losses.
Incredibly, the unemployment rate actually dropped to 13.3%, representing 2.5mln jobs created! In other words, the headline NFP number beat expectations by a record-smashing 10.5mln. We will never see a beat on expectations like that again.
Markets therefore look to see if the US labour market carried this positive momentum in June. The consensus estimate is that a further 3mln jobs were created in the month just past, taking the unemployment rate down to 12.3%.
Citi bank expects an increase of 5.5 million jobs in June, stronger than the surprise addition of 2.5 million jobs in May.
“It has been somewhat perplexing that continuing jobless claims have not fallen further” the bank comments, “but we suspect claims may now lag payrolls as part-time workers continue to claim benefits under the CARES act.”
If we see another big beat on consensus, as Citi predict, how might markets react?
On the face of it, one could argue that markets will react in a risk on fashion – i.e. strength in risk assets such as stocks, crude oil, AUD, NZD, CAD and EMFX, weakness in havens such as bonds, gold, JPY etc, and a mixed USD reaction (boosted by strong US data but weighed on by risk on flows, given it is a safe haven asset).
However, Citi warn that though “the monthly employment report will always be one of the most important data releases for markets… job growth in June could seem somewhat stale to market participants now looking to gauge the outlook for possible stalled re-openings or renewed closures”.
In other words, the recent rise in Covid-19 cases in the US, alongside the associated increase in consumer fear/re-implementation of lockdown measures might encourage investors to look through any improvement in the US labour market in June, with expectations of things to deteriorate in July.
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