To the untrained eye, US data on Wednesday appeared to be much stronger than expected.
ADP National Employment data saw the US economy dropping just 27k jobs in March, much less than the expected more than 150k job losses.
Meanwhile, ISM manufacturing PMI data dropped to just 49.1, implying that manufacturing output in the US only shrunk by a small amount in March. Expectations had been for a much worse reading of 45.
But did USD strengthen on these two data points? No. In fact, it didn't really do much of anything.
You see, neither of these two data points should be taken at face value because important factors are distorting both.
Let’s start with ADP national employment.
The data was collected before or during the week starting on the 12th of March. As I am sure most of you will remember, the US economy only really started to go into lockdown in the second half of March. Therefore, this data was mostly collected during a time period in which most businesses were still open, and the mass layoff (as seen in spiking initial jobless claims data) had not yet begun.
ADP actually noted this themselves; the report does not reflect the full impact of COvid-19 on the overall economic situation, they said.
It is important to note now we are here, this Friday’s NFP data is unfortunately distorted in much the same way.
Danske Bank note that “the (official) jobs report is based on the pay period covering the 12th of the month, which is before the US really started to lock down. In this week, initial jobless claims 'only' rose by 60-70,000 more than a 'normal' week before the coronacrisis.
Moreover, “if you had a paid job in this week, you are counted as having a job, regardless of what happened later in the month. This also explains why consensus among economists is for a decline in employment of 'just' 100,000 (which would put an end to 113 consecutive months with positive employment growth) even though we know that we are in the middle of a very deep recession right now.”
Therefore, from a labour market perspective, the main focus of the week will be tomorrow’s Weekly US Initial Jobless Claims data. According to consensus among economists, the sad record is about to be beaten, as economists expect another spike of 3.5m applications for unemployment benefit last week. We are likely to continue to see layoffs in coming weeks, as long as the US economy remains locked down, and hence the jobs report for April will be extremely negative.
Anyway, what about ISM Manufacturing. A healthy beat no? No.
As was also the case last month, the headline ISM Manufacturing PMI reading was artificially boosted by the Supply Deliveries subcomponent. The subcomponent rose to 65 from 57 last month.
Usually, when supply times rise, this is indicative that demand is strong and suppliers are struggling to fulfill all of their orders. However, at the moment that is not the reason why supply times are rising. Supply times are rising due to severe global supply chain disruptions due to global lockdowns to stem the spread of Covid-19.
Other subcomponents told the true story.
Prices paid plummeted to 37.4 from 45.9, indicative that the sector is heading into deflation. Employment fell to 43.8 from 46.9, its lowest levels since May 2009. New Orders, typically the most forward aspect of the report, fell to 42.2 from 49.8, its lowest level since March 2009.
In the opinion of most analysts, these sub-indices are telling the true story; that the US manufacturing sector is in dire straits. And the US economy was only under lockdown for half of March, meaning April data is likely to be even uglier.
What this means for USD
All this means is that traders ignored these two data points as either out of date or unreflective of the true health of the economy. Well, they did pay attention to the bad ISM sub-components. But all in all, USD was unreactive.
Going forward, as explained above, the markets will pay less attention to NFP on Friday. It is similarly “out-of-date”.
That makes weekly jobless claims data the main event of the week. Remember last week’s 3mln people spike in claims saw USD weaken, as it was seen as increasing the likelihood of more Fed stimulus. Well, a similar reaction tomorrow should we get another upside surprise is not outside the realms of possibility.
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