US NFP preview: A lose/lose situation for stocks?
|Stocks markets stabilized on Thursday after a tumultuous week, however, volatility is still elevated and the Vix index is at the 20 level ahead of August’s Non-Farm Payrolls report that is released later on Friday. We expect today’s European session to be fairly quiet in the lead up to this major economic data release, which comes at a sensitive time for financial markets. Investors are contending with US recession fears, questions about the future of the AI trade, a commodity market sell off and the prospect of an interest rate cut from the Federal Reserve at their meeting on 18th September.
Private sector jobs growth shows signs of weakness
The labour market indicators in the run up to the August payrolls report have been mixed. The ADP reported that 99,000 private sector workers were hired in the US last month. This is significantly lower than the 145k expected. The US economy is still creating jobs; however, this report suggests that the pace of growth is slowing sharply. This is the fifth consecutive month of a slowdown in private sector payrolls, and this was the weakest reading since 2021. There were some worrying details within last month’s ADP report: small companies shed jobs last month, while large companies continue to hire, albeit at a slower pace than we have been used to over the last 2 years. By industry, there were layoffs in the manufacturing sector, which has been suffering for a while, however, last month the tech sector shed jobs along with the professional and business services industry. This is worrying because these tend to be high paying jobs, if there are job losses in this area it suggests an economic downturn could be on the way.
Another weak Payrolls report could be on the way
The leisure and hospitality sector also saw a sharp slowdown in jobs growth, posting only 11,000 jobs last month, which is a sign that the buoyant service sector, which has been a source of inflation, could be cooling. There is no strong historical correlation between the ADP report and the NFP report, however, they usually move in the same overall direction, which supports another weak payrolls number later today.
Job loss announcements surge
Interestingly, initial jobless claims suggest that layoffs remain low. The number of new initial jobless claims were 227k last week, down from 232k the week before. However, jobless claims could rise going forward. The Challenger job cuts number for August suggest that there is pipeline of job cuts coming in the US, with cuts in the Midwest, the South and the East coast last month. The number of job cut announcements soared in August, with 75,891 in total, compared with 25,885 in July. This is one of the highest levels in August for 15 years, and it suggests that the labour market in the US could be souring quickly, which may put upward pressure on the unemployment rate down the line, even if the US economy is still creating jobs right now.
Why the unemployment rate could rise sharply in the coming months
The market is expecting the US economy to create 165k jobs last month, which is higher than the 114k created in July. The unemployment rate is expected to tick lower to 4.2% down from 4.3% in July, however, we think that this will mostly be down to technical factors, and in the longer term the bias is to the upside for the unemployment rate in the US.
The market reaction
Due to the mixed economic signals, along with the focus on Federal Reserve interest rate cuts, the market reaction to this report is difficult to predict. There are some who argue that this payrolls report is a downside risk for US stock markets whatever the outcome. A weak number could lead to a major sell-off akin to last month, as investors worry about the prospect of a major recession and the Fed being behind the curve. However, a strong number could also lead to negative risk sentiment as it may lead to fewer interest rate cuts in the US down the line. Concerns about US growth prospects are weighing on global risk sentiment right now, and today’s data may add to the pressure.
The outlook for the Dollar
The dollar is weak as we lead up to today’s report and it is lower vs. all other G10 FX currencies since the most recent bout of risk aversion, which did not boost the dollar as a safe haven. This suggests that when the market’s fears are centered around the weak outlook for the US economy, the dollar tends to struggle. Due to this, we could see some whipsaw action in the greenback later today. There could be further dollar weakness against the major G10 FX currencies if we get a weak payrolls report today, but it could also snap back if we get a stronger than expected report.
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