The key for investors today
Is payrolls and how they portray
The jobs situation
Thus, whether inflation
Will rocket, or be kept at bay
It’s Payrolls day, generally a session where there is a great deal of anticipation leading up to the release, often followed by a burst of activity and then a very slow afternoon. However, given today also happens to be Good Friday, with all European markets closed in observation, as well as US equity markets, it is likely the burst activity, assuming one comes, will be compressed into an even shorter timeline than usual. Of course, what makes this potentially unnerving is that market liquidity will be significantly impaired relative to most sessions, and any surprising outcome could result in a much larger move than would normally be the case.
It is not a bank holiday, which means the bond market will be trading, and that is, in truth, the market that continues to drive the action. As evidenced by yesterday’s price action, the bond rally, with 10-year Treasury yields sliding 7 basis points, led to a declining dollar and new record highs in the stock market. We also saw gold and other commodities rally as the combination of strong data (ISM at 64.7) and lower yields was a double-barreled benefit.
With that in mind, here are the latest expectations:
|Average Hourly Earnings||0.1% (4.5% Y/Y)|
|Average Weekly Hours||34.7|
All that seems fine, but it is worth a look at the individual forecasts that make up that NFP number. There is a wide dispersion of views ranging from a gain of just 350K to eight forecasts greater than 900K and three of those at a cool million each.
Let’s consider, for a moment, if the optimists are correct. Harking back to Chairman Powell’s constant refrain regarding the recovery of the 10 million lost jobs, the expected timeline for that to happen remains sometime in late 2023. But if this morning’s release is 1000K or more, that would seem to potentially shorten the timeline for those jobs to return. And following that logic, it seems likely that the Fed may find themselves in a situation where ZIRP is no longer appropriate somewhat earlier in 2023 than currently expected as inflation rises, and unemployment falls back to their new goal of 3.5%-4.0%. The implication here is that the bond market will anticipate this activity and we could see the 10-year yield break through to new highs quite quickly. Based on broad market behavior as seen yesterday, a sharp decline in the bond market would likely result in the dollar rebounding sharply and equity futures, which are trading, retreating. And all this on a day when there is much less liquidity than normal.
Of course, a weak number is likely to have just the opposite effect, with the bond bulls making the case that we have seen the high in yields, and dollar bears back in the saddle making the case the dollar’s run higher has ended.
And that’s really what we have in store for the day. The two markets that were open overnight saw equities rally on the heels of the US equity rally, with the Nikkei (+1.6%) and Shanghai (+0.5%) both performing well. Every European market is closed for the holiday and will be on Monday as well. Meanwhile, US futures are all pointing modestly higher, roughly 0.25%, ahead of the payroll report.
As NY is walking in, we are seeing the first movement in Treasury yields and they have edged higher by 1.1bps at this point. But as I highlight above, this is all about the data today.
In the commodity markets, only precious metals are trading but both gold and silver are essentially unchanged at this hour ahead of the data. This follows yesterday’s strong performance with both rallying more than 1% in the session.
And finally, in the FX market, except for TRY (+0.7%) and KRW (+0.4%) there is no movement more than 0.2%, which is indicative of the fact that some positions are being adjusted but there is no news driving things. In the case of TRY, the new central bank governor, in a speech today, made clear that he was not going to cut rates and that he was likely to raise them again in an effort to combat the rising inflation in the country. This was well received by the market and has helped TRY recover much of its initial losses upon the sacking of the previous central bank chief. As to KRW, they released CPI data last night, 1.5%, which was the highest print since January 2020, indicating that growth was persistent, and the BOK would be more vigilant going forward. This also encouraged equity inflows resulting in the won’s modest appreciation.
So, now we wait for the payroll data. Based on the releases that we have seen during the past couple of weeks, where the economy is clearly pushing ahead, I suspect this number will be somewhere above 800K, although 1000K is clearly not out of the question. As such, my view is we will see the bonds sell off and the dollar retest its recent highs, if not break through them.
Good luck, good weekend and stay safe