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US payroll expectations set quite high

US labour market set to improve

Expectations for today’s US jobs report were already high heading into this week, even without some of this week’s positive economic data, and they have only risen further with the S&P500 breaking above 4,000 yesterday, closing at a record high.

Last year’s slowdown in the US jobs market at the end of last year almost seems like another time and is easily explained by the uncertainty over the Presidential handover and the expiry at the end of last year of various emergency programs, which were brought in as a result of the pandemic.

Since that negative -227k December print we’ve seen job gains of 166k and 379k in January and February as a new $900bn stimulus package was passed at the beginning of the year.

Consumer spending, which also saw a slowdown at the end of last year is also seeing evidence of a rebound, along with consumer confidence which surged to 109.7 in March, which augurs well for today’s payrolls report, as does the recent signing into law of another $1.9trn stimulus package a couple of weeks ago.

The vaccination program is continuing apace across the US along with a slowdown in the rise in virus cases, hospitalisations and deaths which is also helping in terms of the US recovery, with today’s payrolls report expected to see another 660k jobs added, and the third consecutive month of gains.

This week’s economic reports have seen some of these estimates revised higher with some economists calling for up to 900k jobs to be added back. This optimism over today’s report has in some part helped fuel this week’s rise in 10-year yields to a peak of 1.77%, though we have since slipped back a touch, and with US bond markets, and most other markets closed, any reaction to today’s report will have to wait until Monday.

The US dollar has also felt the effects of this week’s optimism rising briefly to five-month highs against the euro, though part of that is also down to Europe being caught up in a third wave of coronavirus cases which could well set its recovery back into Q3. As we head towards today’s report we are seeing some modest US dollar weakness ahead of today’s numbers in what can only be described as quite thin trading conditions, with most markets out for the Good Friday Easter break.

There are certainly plenty of reasons to be optimistic about today’s payrolls number given some of the data this week, with the latest ISM manufacturing report showing the best headline number since 1983 at 64.7, while both prices paid came in at 85.6, while the employment component also rose to a three year high at 59.6.

Weekly jobless claims are also trending lower at around 700k a week, while the unemployment rate is expected to fall further, from 6.2% to 6%.

All of this is also very welcome but does need to be treated with an element of caution, given that manufacturing still only makes up about 20% of the US economy, while services make up the rest. That being said if services can’t recover at a time when the US economy is about to reopen and with the weather getting warmer then we really are in trouble. We’ll get a look at the ISM non-manufacturing next week, but whatever today’s payroll numbers, if the next few months don’t see US jobs being added back by the millions, then market expectations will have been very wrong indeed.  

It is true that unemployment has come down from the April peaks of 14.7%, but it comes with the caveat of a sharply lower participation rate, which has also fallen quite sharply over the same period.

This time last year the participation rate was at 63.4% and is now down at 61.4%. This is important in the context of how many people have dropped out of the work force and given up looking for a new role. For context it is estimated that there are up to 9m fewer Americans in work now than there were in February last year

It also reflects the number of people who have more or less given up looking for a new role, and as such understates the actual number of people who are probably out of work, which means the headline unemployment rate probably overstates the extent of the recovery in the labour market.

A more accurate measure remains the underemployment rate which has remained stubbornly high at 11.1%, for the last two months. While this is still below the April peak of 22.8%, it's still well above the low which we saw at the end of 2019, when it was at 6.7%.

EURUSD – appears to have found a bit of base with the rally off 1.1704, and could well see a pull back to the 1.1820 area, or even 1.1870. The bias still remains for a move towards the previous lows at 1.1615, while below 1.1870.

GBPUSD – looking to retest the 50-day MA at 1.3850, with a break above retargeting the 1.3920 area. A move below the 1.3710 area, retargets the recent lows at 1.3670.

EURGBP – slipped down towards 0.8490 and has since rebounded, but needs to move above the 0.8540 level to stabilise and avoid the potential for further losses towards 0.8400.   

USDJPY – fell just shy of the 111.00 area and has since slipped back, with support now down at the 110.20 area as well as 109.80. While above 109.80 the bias remains towards the upside.