Payrolls vs. Coronavirus 2.0
June’s payroll report will be released on Thursday 2nd July, a day early due to the 4th July holiday this weekend. The market is expecting a 3 million increase in payrolls for June, after a decent 2.5 million increase for May. While these are amazing numbers, typically a good payrolls report is a 250k monthly increase, there is still a long way to go before the 22 million jobs that were lost at the peak of the coronavirus crisis are recovered.
It is worth noting that there is a large range of expectations for this month’s reading, with some analysts expecting up to 4 million for June’s NFP report. Thus, we could see some disappointment creep into risky assets if NFPs are around or less than 3million, with the market actually preferring to see more than 3 million jobs created. Good news is expected in relation to the unemployment rate, which is expected to drop to 12.3% from 13.3% in May. But the good news could end there, as average hourly earnings are expected to fall by 0.7% for June, after a 1% decline in earnings for May. While earnings are moving in the right direction, it could take a long time before the 0.3% monthly increase that was the norm for most of the last decade, returns. Earnings are an important lead indicator for the consumer-led US economy, without decent earnings growth then it is hard to see how the US economy can sustain a V-shaped economic recovery.
It’s all about the service sector
Although the manufacturing ISM report for June has expanded at the fastest monthly rate since August 1980, the real test will be the service sector ISM report for June, which will be released on Monday 6th July. The market is expecting a reading of 48.9, up from 45.4. While this is a decent recovery, the market does not expect the service sector to move into expansion territory quite yet. Although the labour market is a lagging indicator, the future trajectory of the US services sector will depend on the genesis of US earnings growth, thus another month of contractionary hourly earnings could spell difficulty for the service sector, and the overall US economy, going forward.
It’s payrolls so watch USD/JPY, of course…
In terms of the market reaction, if payrolls are 3 million plus for June, then we could see risky assets cheer the report, however, the upside may be short-lived. As we move into July there has been a surge in fresh Covid-19 cases across some states in the US, which means that a strong payrolls report for June cannot be extrapolated into the future. The Homebase jobs data, which collects real time data about hourly work at US small businesses paints a worrying picture. It says that the spread of coronavirus is having a devastating impact on small business in the US, which is a major pillar of the US economy. After bottoming out in mid-April, when corona-related job losses were at their peak, things had been improving for hourly workers on a number of metrics including number of employees working, hours worked and locations open. However, over the last two weeks that has stalled. This coincides with the uptick in coronavirus cases in the US and new lockdowns in parts of Texas, California and Arizona. Thus, July’s NFP report could show a deterioration even if June’s job growth is solid.
The uncertainty around the future for the US economy and the US jobs market now that the Covid infection rate is rising once more in the US, makes the market reaction to the June report difficult to predict. USD/JPY is always worth watching as it has the highest sensitivity to payrolls data compared to other currencies and asset classes. USD/JPY has fallen this week and is below the 108.00 level, this suggests an element of risk aversion could be creeping into the FX market as we lead up to the payrolls report. However, US stock markets have had a pretty good week so far. Thus, we could see US stocks do well on the back of a decent payrolls report, however USD/JPY could remain under pressure for the rest of the week, especially since the US will be closed on Friday. 107.00 and then 106.40, the low from 23rd June, are key support levels to watch.