Tomorrow’s U.S. non-farm payrolls report is expected to be the worst ever. Economists believe that more than 21 million jobs were lost in the month of April, which would drive the unemployment rate up to 16%. The last time the jobless rate was in the double digits was in 1983, just after the 1980s recession. Historic job losses should drive currencies and equities lower, but with everyone looking for an ugly report, how much impact will it really have on the markets?
Expectations are one thing, but price action is another. Taking a look at currencies, the persistent sell-off in USD/JPY over the past few weeks tell us that forex traders have positioned for a weak report and, while staggering job losses could still drive USD/JPY lower, the sell-off may be limited if the data doesn’t veer far away from expectations. However, equities and 10-year Treasury yields are hovering near one-month highs, which suggests that traders in those markets are either looking past April data or aren’t prepared for a weak release. We’d like to think that it’s the former since the evidence of staggering job losses are everywhere, but given that stocks and Treasury yields are up over the past month, even a modestly weaker report could send equities tumbling lower. For currencies, this means there’s scope for broad gains for the Japanese Yen and Swiss Franc and extended losses for USD/JPY.
Keep an eye on average hourly earnings because that’s where the big surprise could be. Economists expect earnings growth to hold steady at 0.4% and rise from 3.1% to 3.3% year over year. This is difficult to fathom considering widespread reports of companies keeping employees on payroll but cutting salaries. If wage growth turns negative and the rest of the jobs report is in line, it could be enough to send equities and currencies sharply lower.
In what scenario could stocks and USD/JPY rise? If every part of Friday’s labor market number is in line with expectations – that means stronger wage growth, an unemployment rate of 16%, 21 million jobs lost and no revisions to March data – the markets could rally. The numbers could also be so weak that we see a sharp sell-off that triggers a vigorous recovery as investors think that’s the worst of it and move on. So in a nutshell, the best way to trade NFPs is to either sell ahead of the report and close before or wait for the numbers to be released, prices to stabilize and see what becomes the real move of the day.
Here’s a look at how the leading indicators for NFPs stack up this month illustrating why the forecasts are so grim.
Arguments in Favor of Strong Non-Farm Payrolls
None.
Arguments in Favor of Weak Non-Farm Payrolls
1. Employment component of non-manufacturing ISM falls to record low
2. Employment component of manufacturing ISM falls to 71-year low
3. ADP reports 20.3 million jobs lost
4. Challenger reports 1,576% increase in job cuts
5. 4-week average jobless claims at 4.1 million, up from 2.6 million
6. Continuing Claims jump to 22.6 million from 18 million
7. University of Michigan Sentiment index falls to lowest on record
8. Consumer Confidence index falls to lowest level since 2014
Canadian labor market numbers will also be released on Friday, and another month of record job losses is expected. A million jobs were lost in March, but in April that figure is expected to top 4 million. The recent recovery in oil prices helped to stem the slide in the loonie ahead of Friday’s report even though Canada’s IVEY PMI plunged to a fresh record low of 22.8 with the employment subcomponent falling to fresh record lows as well.
Sterling ended the day lower after the Bank of England’s monetary policy announcement. Although the BoE left its bond-purchase program and interest rates unchanged, two members voted in favor of an immediate increase in bond buys and Governor Andrew Bailey admitted that they could do more Quantitative Easing next month in June. They expect inflation to fall below 1% in the coming months, consumption to fall 14% and the economy to contract by as much as 14% in its 2020 scenario. For all of these reasons, monetary policy committee members said they are ready to ease further. They are still “nowhere near using negative rates” but more QE is almost certain.
The Australian and New Zealand dollars traded sharply higher today on the back of stronger Australian and Chinese trade data. Instead of falling 14%, Chinese exports rose 8.2% in the month of April, causing the trade surplus to jump to 45.34 billion from 19.93 billion. Caixin’s PMI indices also increased in April. In Australia, service sector activity contracted further, but the trade surplus more than doubled as exports jumped 15% in March. AUD remains in focus as the Reserve Bank of Australia releases its statement on monetary policy and economic projections this evening – in many ways this should be more market-moving than the RBA rate decision earlier this week.