Remember all those hyperbolic warnings over the years that "this is the most important jobs report" ever? Well, the one due out tomorrow may not be that, but it certainly is one of the most important ones in the past year, and one that will certainly have an impact if not on the Fed's future actions then certainly on the market's (once again erroneous) expectations of what Yellen may do, especially if it is a +/- 60,000 outlier from the consensus estimate of 180,000.
Recall last month's "shocking" jobs print, when only 35,000 new jobs were created, the lowest number since September 2010?
Well, that one print was sufficient to convince the market there would be no more rate hikes in 2016 and most of 2017. A few weeks later, first the capitulatory June Yellen press conference and shortly after the just as "shocking" Brexit, effectively killed the rate hike cycle, with the market now pricing in one full rate hike (that is 0.25bps) all the way in 2018. As LIesman raged, "The Fed Is As Close To Capitulation As I've Ever Seen Them."
But maybe there is some hope still. If so, it will be revealed in tomorrow's payrolls report. As Bloomberg says, "the June jobs report will take on even more importance than usual. Economists and policy makers will use it to determine whether the strongest part of the economy slowed sharply even before concerns over global growth intensified, or if the labor market was merely hit by a temporary soft patch." Ignoring that jobs are among the most lagging economic indicators known, the general (confused) consensus about what payrolls indicate suggests an outsized market response may be forthcoming.
“There is a potential for a big reassessment on Friday for the outlook,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “Given how much views changed after the last report, I get the sense that the anticipation level going into this one is unusually high.”
Wall Street consensus expects 180,000 jobs to be added in June following the abysmal 35,000 in May. One benefit will come from the return to work of striking employees at Verizon. 35,100 Verizon employees ended their almost seven-week work stoppage on May 31. Once the strikers are factored out, “that does imply some net slowing of the trend,” O’Sullivan said. Still, that rate of hiring “remains more than strong enough to keep the unemployment rate trending down.”
Another "good" datapoint will be unemployment rate, expected to rise to 4.8% after falling to a more than eight-year low of 4.7% in May. This however was due to an exodus of workers from the labor force, as the participation rate resumed its plunge.
Earnings will also be closedly watched, with average hourly earnings expected to rise 0.2% in June from the month before and 2.7% Y/Y. However, if that again comes at the expense of yet another decline in hours worked it will be a clear stagflationary sign for the economy. Furthermore, since the wage number weakened in June 2015, a bigger bounce this year may be expected due to a base effect. Looking past that, there still seems to be a nascent acceleration in pay, said Ethan Harris, head of global economics research at BofA.
There is also the strawman of the Brexit effect. Bloomberg paints it as follows: "Brexit complicates things. With U.S. economic data now being pored over for signs of weakness, there’s extra downside risk associated with a bad payrolls number -- anything under 100,000, Harris said. Unfortunately, the report will offer little clarity on how employers reacted to the U.K.’s decision to leave the EU. With the referendum held June 23, any immediate impact to U.S. employment may have been limited, even as investors grew concerned that the global economy’s growth prospects have dimmed."
All of this is bunk, as Brexit will have had zero impact on US hiring (and firing) intentions for US corporations in the middle of last month, when the widely accepted probability of an actual Brexit outcome was virtually nil. Indeed, as the latest ISM surveys showed, producers expected a ‘negligible’ impact on their business due to Brexit and signaled they would probably not pare headcounts as a result of the vote.
And speaking of ISMs, except for the non-manufacturing ISM report, all of the service sector employment surveys declined or were unchanged in June, including the Markit PMI (-0.1 to 52.4), the New York Fed’s Business Leaders survey (-0.2 to +2.0, after our seasonal adjustment), the Dallas Fed services survey (-2.5 to +2.0), and the Richmond Fed services survey (unchanged at +18.0). Today's collapse in manufacturing jobs per the ADP report was the worst since 2010.
Then again, and it goes without saying, when one cuts through the chase, the only thing that will matter is what instructions the guy who mans the BLS' goalseek function is given.
* * *
What to expect from the market reaction? Here is a handy breakdown from one of the few voices on Wall Street we respect, BofA's Michael Harnett:
- Payroll risk is strong payroll (>225k) which causes relative outperformance of banks at the expense of bonds & quality stocks; strong US labor market & consumer data (note that US mortgage refi activity has been slowly creeping higher) that raises Fed hike expectations from the dead would lead to a short-term unwind of some very extended pair-trades across the world.
- In contrast, a weak payroll (<125k) removes “terra firma” of US expansion, would in absolute terms be best for gold & volatility, and would ultimately cause further barbell outperformance.
* * *
But perhaps the best indicator of what may be really coming tomorrow is the following chart showing the complete collapse in online help wanted ads: as shown below, the Conference Board’s Help Wanted Online (HWOL) report showed another sharp drop in job posting in June, with the index now down 16% from its highs late last year.
On its face, this chart would suggest a collapse in payrolls, incidentally something that we have seen in recent months. But fear not: the intrepid economists at the Federal Reserve who are always and everywhere able, willing and ready to explain away any negative data point, already have a ready explanation - the collapse in online help wanted ads is due to... rising prices for Craigslist ads.
About 60 percent of online advertised vacancies are posted on only five of the largest job boards (?ahin et al., 2014). One of these five boards is Craigslist, which has used a particular business strategy in order to dominate the market for online vacancies. In particular, while its competitors like CareerBuilder or Monster typically charge $250-$500 for a 1-2 month job ad, Craigslist initially entered all geographical markets by allowing employers to advertise job postings for free. As a result, Craigslist "rose from near obscurity in 2005 to become a major contender, if not the leader, in online job posts by 2007" (Kroft and Pope, 2014). However, over time Craigslist gradually moved away from the model of free online vacancies and began charging $25 for a job ad in many metropolitan areas (Table 1). Moreover, at the end of 2015 Craigslist raised fees from $25 to $35 or $45 in selected metropolitan areas. All told, the average price for Craigslist job ads rose substantially, and roughly doubled since the end of 2012 (Figure 2), coinciding with the period when online vacancy posting as measured by HWOL noticeably underperformed the JOLTS vacancy growth.
In this note, we suggest that interpreting the measure of job vacancies from HWOL data requires careful consideration of changes in the quickly-evolving market for online job postings. We have analyzed one such change--rising prices for Craigslist job postings--which explains an important part of the recent divergence between JOLTS and HWOL vacancies. Our finding is reminiscent of similar concerns about the now obsolete Help Wanted Advertising Index of print ads, which was affected by changes in advertising practices and changes in competition within the newspaper industry (Abraham, 1987). Given the critical nature of HWOL data in tracking the health of the US labor market, we believe the adjustments proposed here are a step towards improving analysts' ability to interpret these data and can lead to a fuller understanding of labor market developments in real time.
In short, if tomorrow's jobs report is another epic disaster, we expect that the following blog post on the federal reserve website will mysteriously disappear. On the other hand, if June payrolls soar by 200,000 or more, well, just blame the greedy capitalists at Craigslist.