European stocks have made some fairly decent gains this week, and while we haven’t seen record highs for the likes of the CAC 40 and DAX, it can only be a matter of time, even as the Stoxx 600 has done so every day, with the FTSE 100 once again notable for its underperformance.
US markets also enjoyed a decent day, with the Nasdaq and S&P 500 also setting new records yesterday, ahead of this afternoon’s eagerly awaited July jobs report. In Asia this morning, equity markets look set to close out the week in modestly positive fashion, with the Nikkei 225 closing the week higher and the ASX 200 closing just below yesterday’s record high. Markets here in Europe look set to open mixed, as investors mark time ahead of today’s US non-farm payrolls.
There has been plenty of speculation about the importance of today’s jobs report in terms of the timing of a possible tapering of asset purchases, as well as when to expect a possible rate hike, whether it be early 2023, or late 2022. The reality is, whatever today’s number is, the picture is unlikely to be any clearer after the numbers drop than it is now, which means this month’s Jackson Hole symposium probably won’t offer investors the steer on monetary policy they hope it will. This is because no-one on the FOMC really has any idea what the US economy will look like a month from now, let alone a year from now.
If we look at last month’s June payrolls, it was a much better number than expected on the headline figure. The 850,000 jobs added was certainly a decent improvement on the May number of 583,000, but it didn’t tell us too much about the overall state of the US labour market, in terms of how quickly those US workers who have dropped out of the workforce since February last year are likely to come back.
Despite the beat on the headline number, the unemployment rate actually edged higher to 5.9%, from 5.8%, while the underemployment rate fell from 10.2% to 9.8%. All the while the participation rate remained unchanged at 61.6%. This appears to be more of a concern for some on the FOMC than the big rise in prices that we are currently seeing in some of the latest economic data, although we are now starting to see modest evidence that some prices might be cooling.
New York Fed president John Williams is one member concerned about the lacklustre participation rate, given where it was pre-pandemic at 63.4%. Since the June report, little has changed when it comes to the US economy, with the data broadly mixed, with most expectations that the Fed is set to remain on autopilot until Q4 whatever inflation does.
Today’s July report comes against a backdrop of continued elevated prices, and weekly jobless claims that appear to have found a base around the 400,000 level, while this week’s ADP report was much weaker than expected, falling back to 330,000, well below expectations of 695,000. On the flip side of the coin, both ISM reports showed some decent gains in the employment components, suggesting that July hiring was picking up, begging the question, which surveys should we believe?
Some US states are already phasing out some of the emergency benefits brought in as a result of the pandemic, in an attempt to force people back to work and off stimulus payments, thus hopefully helping to boost the participation rate. This should work in part; however, it is unlikely to be enough to fill the over 9m job openings currently unfilled in the US economy, and probably won’t until all unemployment benefits cease in September, and the schools go back.
This appears to be what is causing sleepless nights at the Federal Reserve. How many of those 7m people no longer in the labour force and not reflected in the current participation rate will come back? How many have retired early or set up their own businesses? Quite simply it seems too early to know, and while the Fed can talk about the prospect of tapering or rate rises, as Fed vice-chair Richard Clarida did this week, they can’t do anything about labour market mobility.
Consensus expectations for the non-farm payrolls are for 870,000 new jobs to be added in July, having come down from 925,000 just over a week ago, with a range of expectations between 350,000 at the low end to 1.6m on the optimistic side. That’s a spread and a half, so good luck trying to pick the bones out of that.
On the plus side, if we do get a move higher in the participation rate to 61.8%, as forecasts suggest, that might be a small step in the right direction and offer some comfort to central bank officials that normality is slowly returning. The only obstacle to that is that infection rates are rising again in some US states, which means that the incentives to return to the workforce might get delayed a little bit further.
EUR/USD – has finally slipped below the 1.1850 area, slipping towards the 1.1825 area. Bias remains for a move towards 1.1750 while below the 1.1875 area. Resistance also comes in at the highs this week at 1.1900.
GBP/USD – looking better bid having found a base near 1.3870, however unless we can get back through 1.4000, we remain vulnerable to a move towards 1.3820. A fall below 1.3800 argues for a return to the 1.3720 area. A move through the 1.4020 area is needed to reopen the path higher.
EUR/GBP – slipped back from the 0.8560 area earlier this week and has now slid below 0.8500, with the 0.8480 level the next support. A break below 0.8480 targets a potential move towards 0.8280.
USD/JPY – found support at 108.70 on Wednesday, with the current rebound needing to see a move through 109.80 to reopen the 110.20 area. While below 109.80 the risk remains for a move towards the 108.20 area.