Previewing Tomorrow's 'Anti-Goldilocks' Payrolls Data
It appears - judging by today's shenanigans - that good news for Main Street (rising employment costs) is bad news (for stocks), though obviously there are other factors; but tomorrow's payrolls data is the last best hope before the Fed finishes its taper for them to pull a 'data-driven' U-turn out of the bag. Consensus is for a drop from last month's exuberance at 288k to 230k (with Barclays slightly cold and Deutsche slightly hot). The fear, for market bulls, is that the print is anti-goldilocks now - not bad enough to provide excuses for lower-longer Fed rates; and not high enough to justify the hockey-stick of miraculous H2 growth priced into stocks. Average S&P gains on NFP Friday are 0.5% but recently have become more noisy.
Over 200k would be the 6th month in a row for the first time since 1997!
Over 300k (above highest expectations) and we suspect The Fed would be under pressure as that would mean a six-month average above the last expansion cycle peak...
Under 150k (below lowest expectations) and The Fed will fall back into lower longer, tease with moar QE mode...
Barclays is modestly lower than consensus:
We forecast a rise of 225k in US payrolls in July, softer than June’s 288k gain, but in line with the 231k average monthly increase in 1H 14. Initial and continuing jobless claims fell between the June and July survey weeks, and other indicators also point to solid job growth. The breadth of improvement across labor market indicators and recent trends in job growth hints at some upside risk to our forecast. We look for the strong pace of job growth to lead to a fall in the unemployment rate to 6.0% from 6.1%. Elsewhere in the report, we look for a 0.2% rise in average hourly earnings and for the workweek to remain unchanged at 34.5.
Goldman's Jari Stehn is right above consensus at 235k:
- We expect a 235,000 increase in nonfarm payrolls and a one tenth drop in the unemployment rate to 6.0%. As far as payrolls are concerned, our forecast would be a solid gain but at a pace slightly below that seen over the past few months. While a number of labor market indicators improved slightly in July (including jobless claims, the business survey employment components and household job market perceptions), other considerations point to a deceleration in the pace of employment creation (including a slowdown in ADP employment growth, softer online job advertising, higher layoffs and the composition of the June payroll gain).
We forecast a 235,000 gain in nonfarm payrolls in June, a one tenth drop in the unemployment rate to 6.0%, and a 0.2% increase in average hourly earnings. As far as payrolls are concerned, our forecast is slightly above the latest 230,000 Bloomberg consensus, but below the current three-month moving average of 272,000.
A number of labor market indicators were somewhat stronger in July:
1. Slightly lower jobless claims. During the employment survey period (the week including the 12th of each month), initial jobless claims declined by 11,000 on a spot basis and 3,000 on a 4-week moving average basis. Continuing jobless claims were also down slightly.
2. Somewhat better business surveys. The employment components of the main business surveys at hand--Empire, Philly Fed and Chicago PMI--all edged up in July.
3. Improved household job market perceptions. The difference between households viewing jobs as "plentiful" vs. "hard to get" improved from -16.1% in June to -14.8% in July, the best reading since May 2008.
Other considerations, however, point to a deceleration in the pace of employment creation in July:
1. A slowdown in ADP private employment growth. The ADP measure of private employment growth decelerated more than expected, from 280,000 in June to 218,000 in July. That said, ADP has generally not been a reliable predictor of private payroll growth, either before or after the latest round of changes to the methodology in 2012.
2. Softer online help-wanted advertising. The Conference Board's survey of online help-wanted ads showed a seasonally adjusted drop of 15,000 in July, following a large gain in June.
3. Higher layoffs. The Challenger, Gray, and Christmas survey of announced job cuts showed a seasonally adjusted increase from 31,000 in June to 47,000 in July. The job-cut news was dominated by Microsoft, which announced plans to reduce its workforce by as many as 18,000.
4. Special factors. Finally, the composition of the June report points to a couple of areas where we might see some reversal in July. First, employment in auto retailing was unusually strong in June (worth 10,000). Second, June showed an atypically large gain in state and local government employment (worth 20,000), possibly due to seasonal distortions associated with the end of school year.
Taken together, we therefore expect a deceleration of the pace of payroll growth to 235,000 in July. We furthermore forecast a one-tenth decline in the unemployment rate to 6.0%, which is predicated on a roughly stable labor force participation rate. We expect average hourly earnings to rise by about 0.2%.
Deutsche Bank's Joe Lavorgna (after his 7 sigma miss in Chincago PMI today) is above consensus expectations at 250k:
July initial jobless claims suggest we could see a much stronger nonfarm payroll number, at least post-revision, than what we are expecting.
Deutsche Bank's FX quant team analyzes the historical performances...
Broadly as expected data this week, will probably be taken as ‘another bullet dodged’ and favor risk appetite temporarily, but the USD is losing its status as a favored funding currency to the JPY and EUR and this is unlikely to change without significantly softer than expected US numbers.
The front-end (2y yield) has had the most consistent on the day reaction to payroll surprises this year, and the front-end (Eurodollar and fed fund futures) should remain one of the more reliable places to express macro trades.
Intra-day patterns this year show that of the post-release responses, USD/JPY has tended to reverse its 5 minute move on 3 out of the last 7 releases – which is disconcerting and affirms the data needs to surprise substantially to generate follow-through.
A mix of two strong additional (July and August) employment reports that push the U3 unemployment rate below 6% by the September FOMC meeting, will likely be enough to prompt a clear change in Fed tone, adding reinforcement to the recent stronger USD tendency.
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Anti-Goldilocks? or miraclous Goldilocks reversal? Well it is Friday after all...
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