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US payrolls set to post another big gain

After the recovery seen in Q2, equity markets and economies have continued their attempts to recover back towards this year’s peaks with varying degrees of success.

While the Nasdaq has continued to sweep all before it with yet another all-time high last night, the DAX, S&P500 and to a lesser extent, the FTSE100 have struggled to move beyond a fairly contained range, over the past few weeks.

Some of yesterday’s early Q3 early enthusiasm came about as a result of continued improvements in economic data, coupled with optimism over an experimental vaccine from Pfizer and BioNtech which produced positive antibody results, thus helping the overall mood.

This optimism was offset by rising concern about further increases in infection rates as daily rates continued to rise in various states. While this was always going to be a concern, as economic activity started to return to normal, the only worry would be if it started to result in a rise in death rates. This now appears to be happening, with a rise in deaths in both Arizona and Texas, while California and New York City announced the closure of indoor dining and some bars. Apple also announced it was re-closing another 77 stores across the US.  

In the UK it was another dark day for job losses with a swathe of companies announcing a wave of reductions in head count. In the past two weeks a raft of companies, including BP, Shell, Rolls Royce, Airbus, British Airways, EasyJet, Ryanair, Restaurant Group, Debenhams, Mulberry, Oasis as well as John Lewis and Harrods have announced job cuts to the tune of over 50,000 people.

Despite this glum outlook markets for now appear to be unperturbed, however this could change once the unemployment numbers start to rise, and more importantly the furlough effect starts to wane.

There was nothing too substantial from last nights Fed minutes, and while yield curve control was discussed there was no real consensus other than policy needed to stay accommodative for an extended period of time.

Markets in Asia had a fairly decent session, lifted by the positive vaccine news, with markets here in Europe set to open higher ahead of today’s US nonfarm payrolls report for June, which is due to be released today due to tomorrow’s Independence Day holiday in the US..

Today’s economic docket is all about the unemployment numbers, starting with EU unemployment set to rise to 7.7% from 7.3%, a number that still seems artificially low due to the way the numbers get reported.

Yesterday’s ADP payrolls report may well have come in slightly below expectations, at 2.37m jobs added, but it wasn’t that number that stole the headlines, it was the revision to the May number, that prompted a huge amount of head scratching. In May, ADP reported that -2.76m jobs were lost, however in yesterday’s revision this was changed to 3.06m jobs added, a swing of nearly 6m jobs.

After the loss of a record 20m jobs in April, expectations were high that May’s non-farm payrolls report would produce further job losses in the millions, given how disappointing the ADP report a few days before had been.

This belief was turned on its head, on both counts, as the BLS numbers for May confounded expectations with 2.5m jobs added, while yesterday we discovered that ADP revised their May numbers by a record 6m, prompting a head-wrenching turnaround to 3.06m jobs added.

The extent of yesterday’s revision, suggests that we can expect further volatility later in the US jobs data in the days and weeks ahead, however it does offer hope that, over the course of the next few months, more furloughed staff will return to work.

While today’s numbers will be eagerly anticipated they still can’t disguise the effect that the pandemic has had on the US economy as well as wider labour market, with weekly jobless claims still trending at well above the 1m per week mark, albeit on a downward track, while continuing claims, fell below the psychologically important 20m level for the first time since the 17th April last week .

Expectations for today’s June employment report are for further jobs gains, though the estimates vary widely from just under a million to as high as 8m, though the consensus is for just over 3m. In light of the revision to the May ADP number we should also be mindful of a similarly significant revision here as well.   

The unemployment rate is expected to fall from 13.3% to 12.5%, however before we get too carried away, while these job gains are very welcome, further progress could become much more difficult given the sharp rise in coronavirus infection rates we are already seeing in a number of US states, which has seen them either close back down, or delay their re-opening plans. The other numbers to keep an eye on are the underemployment rate, which last month hit 21.2%, having been at 7% in February, as well as the labour participation rate in order to get a broader gauge of what condition the US labour market is in at this very fluid time. The participation rate hit a 5 year high of 63.4% in February before hitting a 40 year low of 60.2% in April. This did pick up in last month’s numbers to 60.8% and we’ll be looking for another increase here as US workers return to the workforce.

Despite these setbacks the broader economic data has been more positive than negative with yesterday’s ISM manufacturing numbers also improving, while the latest manufacturing PMI numbers in Europe also showed further stabilisation.

EURUSD – held above support at the 1.1160/70 area again yesterday. Rebounds continue to look shallow with a break below 1.1160 potentially opening up a return to the 1.1020 area and the 50, and 200-day MA’s. Above the 1.1350 area retargets the highs from June at 1.1425.

GBPUSD – another decent day yesterday as we continue the recovery off 1.2215 support. Only a break below targets a move back to the May lows at 1.2075.  Having moved above the 1.2450 level we need to see a move above 1.2540 to retarget the June highs, above 1.2800

EURGBP – looks to be heading back towards trend line support from the lows this year, currently 0.8995, after the failure at the 0.9180 level and reversal day. While above the 0.8990/0.9000 area the bias remains for a move back to the 0.9240 area. Below the 0.8980 area could well see a move towards 0.8920.  

USDJPY – another failure at the 108.00 area has seen the US dollar slip back. While below 108.00 the risk is for a move back towards the 107.20 area.

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