Jobless Claims and ADP Give Glimmer of Hope for September NFP
For a second week in a row we saw jobless claims hovering around the 400K level, which is a positive sign for the US labor market. The 400K level is a barometer for job growth. If claims stay below that level it is usually associated with 150K+ in the non-farm payroll (NFP) report. Throughout September we saw jobless claims rise as we can see from the 4-week moving average (red line) in the chart below.
The ADP Employment change on Wednesday showed the private sector adding 91K jobs in September, a better than expected reading (forecast was 75K). That bodes well for the non-farm payroll report as well, but last month the ADP, which registered a similar reading at the time of 91K, widely missed the mark in terms of the private sector job gains that we saw in the subsequent NFP of 17K.
Therefore, we’ll see if private sector jobs will show a better reading for September, and if we see some upward revisions to the August report, considering the ADP continued to show modest job gains.
The consensus forecast is for a 50K gain in the NFP, following a zero reading in August.
Now, 45K jobs were taken out of that equation because of striking Verizon workers (which could have meant a gain of 45K jobs in August), and those jobs will be re-added to the NFP report this month (meaning the consensus forecast could be as low as 5K gain instead).
Therefore, if the consensus holds we are still seeing monthly job gains of around 25K the last two months, completely inadequate to do anything against an unemployment rate that is hovering above 9%.
ISM Employment Sub-Gauges However Point to Weakness
If we look at the ISM manufacturing and services employment sub-gauges from earlier this week, we see that in the manufacturing report the employment sub-guage rose by 2 points to 53.8 from 51.8, however its the services sector that makes up 70% of the economy, and there we see that employment dipped 2.9 points to 48.7 from 51.6.
The 50 level separates expansion from contraction in these surveys. Overall, the picture is not reassuring and could mean that claims return back to the higher levels we had seen throughout September.
What to Expect from Market Reaction
Better Than Expected Report - A jobs figure that surprises on the upside would have 2 impacts – it should be help to boost US equities but also help the dollar to gain.
Usually these two markets move opposite to each other as the US dollar is considered a safe haven, and during times of risk appetite or when equities are climbing then the dollar weakens. However in this particular indicator, when it comes to jobs and the labor market, the impact is more direct on the US dollar. Why? Well it’s because good news on the jobs front would mean that the Federal Reserve would have less pressure to follow through with further monetary easing in order to help the jobs picture. That then is a positive for the US dollar. Now we still may see the US dollar weaken if risk appetite is very strong, but the non-farm payroll does tend to have this dual impact.
Weaker Than Expected Reading – A weaker than expected reading would add further pressure on the Fed to act and therefore would weaken the US dollar from a monetary policy perspective. However a weaker jobs reading would also pressured stocks and risk appetite and therefore safe haven currencies like the Japanese yen and US dollar should benefit.
Therefore it’s always a little tricky trading to non-farm payroll report, trying to anticipate beforehand exactly which way the market will take the news.
Recent US Data Helps Stabilize Markets
Economic data from the US has been slightly better of late, helping to stall some of the doom and gloom that we have seen to in September.
In addition to the aforementioned jobless claims and ADP report, we did have the headline ISM manufacturing reading come in better than expected, and the ISM services index also held to the levels seen in August. Motor vehicle sales jump by 1 million units in September and even construction spending moved into positive territory. With more action on the EUroepan sovereign debt front from Euroepan leaders including talk of recapitalizing European banks, we have seen a 3-session rally in equities as we head into Friday’s trading.
Here, an underwhelming reading, especially a print showing negative job growth, would be very detrimental to sentiment and cause a move back safety in financial markets and equities could give up this nascent rally. However a surprise to the upside can really help to undercut some of the conventional wisdom right now which is that the US is heading closer and closer to a double dip recession scenario and give equities further reason to rally.
The jobs report will also have political implications. If we have another very poor reading that would increase pressure on Congress to act to help to support the labor market. The President has been campaigning on the back of his American Jobs Act and held a press conference today try to win over public opinion on the matter. Independent economists have said that taking up the American Jobs Act could help prevent a double dip recession as well as help to boost job growth. Republicans are loath to pass such a bill as not only could it help the economy and therefore hurt their chances politically, but they don’t believe, in principle, on the government spending money to try and help stimulate the economy. They’re also concerned about ways to pay for the legislation which may put a higher tax burden on the wealthiest Americans. The September jobs report, if weaker, can make it harder for Republicans and any wavering Democrats from voting on the legislation.
This chart of non-farm payrolls for the months of 2011 shows that the debate in Washington had a lot to do with the last four months of weak job growth. During this time we have seen spending cuts taking effect which were then followed up by a battle over the debt and the debt ceiling, which culminated in the US coming close to defaulting, and as a result saw its credit rating downgraded from AAA by S&P. In essence, part of the weakness in the labor market is a self-inflicted wound by politicians who during a time of weak growth have insisted on cutting aggregate demand by cutting government spending. While it’s a noble effort to want to lower government spending, it needs to be done at a time when doing so doesn’t tip the economy back into recession.
Chief Market Analyst
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