Non-Farm Payrolls complicated by coronavirus and confusing data, dollar, gold implications

Are Non-Farm Payrolls expectations too high or too low? The resurgence of coronavirus, confusing leading indicators, and other factors complicate calculations. Valeria Bednarik, Joseph Trevisani, and Yohay Elam thrash out all the factors and discuss the impact on the dollar and gold.

Yohay Elam: The FXStreet Economic Calendar is showing a consensus of around  1.6 million jobs gained in July, following a leap of 4.8 million in June. Are these expectations up to date? Or have estimates changed after this week's leading indicators?

Valeria Bednarik: I would go for a change. Leading indicators have been awful. Indeed, the latest Initial Jobless Claims have gave signs of life, but it does not count for the monthly Nonfarm Payroll report.

Joseph Trevisani: I would say that estimate is low.

Valeria Bednarik: Why?

Joseph Trevisani: PMI reading has been strong, and the record of forecasts in the pandemic has uniformly underestimated the return of employment.

Yohay Elam: While headline ISM PMIs were great, the employment components were under 50, pointing to contraction

Valeria Bednarik: When it comes to underestimating the return of employment, you have a point. Thinking out loud, do you think that without the $600 benefit, maybe even more people rushed to look for a job?

Yohay Elam: The federal unemployment benefits impact consumption, not employment. There is an issue with the supply of jobs, not with demand

Joseph Trevisani: In May, the forecast was -8 million, rolls added 2.699 million, in June the forecast was 3 million, 4.8 million arrived

Yohay Elam: Perhaps economists have upped their game

Joseph Trevisani: As for the employment PMIs, yes, they are in contraction, but they are sentiment numbers and I can easily see managers being cautious but still bringing back workers.  I also think the impact of the Southern and Western Covid rise is vastly overstated and in fact the new cases have tailed off sharply, never threatened the hospital system and fatalities have been much much lower. I have also been considering that the claims and payrolls represent two different sets of workers.  Claims may stem from hourly and small business employees which are likely failing in large numbers at this point, while payrolls are from the overall economy which is recovering.

Yohay Elam: The caseload, hospitalizations, positive-test rate, and deaths are all worrying in many states. The Northeast's success in keeping things under control is balancing the situation elsewhere, but the extent is unknown

Joseph Trevisani: The Atlanta Fed GDPNow estimate is 20.3% for Q3, which must entail widespread hiring. Worry tends to be for a purpose.

Yohay Elam: Jobless claims increased in early July, Consumer sentiment dropped

Joseph Trevisani: Yes and I think it is from small business failures and consumers no doubt reacting to the COVID spread and coverage.

Valeria Bednarik: I have to agree with Yohay. The pandemic is out of control and people are scared. That's a big hit for consumption.

Yohay Elam: The Fed is worried, but stayed on-hold. Eventually, the virus is the boss

Valeria Bednarik: And Congress can't find common ground for the next aid package

Joseph Trevisani: My point is that if the current trends continue in Florida, Georgia, Texas, and California,  the openings will have been a success.

Yohay Elam: I'm optimistic on Congress, Trump and Pelosi will eventually strike a deal

Joseph Trevisani: The fact that Congress can't agree tells you that the situation is normalizing.

Valeria Bednarik: Yeah, nobody wants to be blamed for a failure.

Joseph Trevisani: Political considerations are growing, that is why the delay.

Yohay Elam: Openings are not a success for those who died, and the US death rate is high. Three months to the elections, politicians tend to throw money, it's a global phenomenon...

Joseph Trevisani: That is not a statistical criteria. Individual death is always sad. The US death rate is on the low end of the developed nations.

Valeria Bednarik: The rate is meaningless when you have 161K deads...

Yohay Elam:

Valeria Bednarik: And I guess nobody can forget that Trump refused to lockdown, refused to use a mask, didn't act timely at the beginning, and call it a flu. The US is now paying the price of those decisions.

Yohay Elam: And Fox News echoes that message. They have the best ratings

Valeria Bednarik: Yeah, media is the fourth power

Yohay Elam: Regarding the Non-Farm Payrolls, ADP's numbers have been far from the BLS ones, but they did point to the trend

Valeria Bednarik: ADP has been the biggest negative shock for me.

Yohay Elam: When ADP pointed to a smaller than expected job loss in May, the official number came out positive. Now ADP's number missed estimates. It is not a good sign

Joseph Trevisani: I disagree the rate is not meaningless. Lockdowns cause immeasurable harm, they are as much of a health crisis as the pandemic.

Valeria Bednarik: True, ADP and NFP are not always aligned, but it was a too low number not to be relevant today

Yohay Elam: My #NFPGuess is an increase of 500K, lower than original estimates, but not negative

Joseph Trevisani: The ADP case is interesting and since it is one of the main indicators. It's worth examining.  The last two months have seen large upward revisions, in May from -2.76 million to 3.065 million and in June from 2.369 million to 4.314 million.  That is why I put small faith in the July number (chart from RealClearPolitics)

Yohay Elam: Their revisions are worthless, as they just aligned their numbers with the official BLS, it's not an updated ADP survey

Joseph Trevisani: If the revisions are worthless then so are the initial figures.

Yohay Elam: I think the initial figures point to a trend. If they beat big-time, NFP beats big time, and if they miss big time, it is hard not to expect a miss in the NFP

Valeria Bednarik: I could understand a sharp revision in those months, amid statics mess, but I tend to believe that, ever since things are more "stable" now, we are not going to see big revisions, neither a positive number this time. Anyway! let's say we get that 1.6M or even 2M. Do Do you think that would be enough to save the dollar? I don't.

Yohay Elam: Dollar weakness looks like a strong trend

Joseph Trevisani: Not to belabor the point, but the May ADP initial number of -2.76 million had zero predictive value for the NFP number that month, June was better but still off by a large factor.

Yohay Elam: So does gold's rise, unbelievable, lot's of FOMO. I think the dollar depends more on a big fiscal deal

Joseph Trevisani: No, I think you would need a rather large beat to dent the dollar losses.

Valeria Bednarik: Fear of missing out? LOL. Agreed, dollar's comeback more related to fiscal deal than to employment figures.

Joseph Trevisani: Market scenario now is the US economy is being dragged down by the virus, it will take more than on statistics, even NFP to change that view.

Valeria Bednarik: If you think, before the pandemic, the NFP report had already lost the power of rocking the markets. Most times, it was a no-event for the past two, three years

Yohay Elam: Yeah, my adrenaline is still running high ahead of the NFP, but I must agree it isn't the market-mover it used to be

Joseph Trevisani: I think the fiscal deal is probably more important to equities than the dollar

Yohay Elam: Perhaps a surprise gain of 3 million would boost the dollar? Lowering the chances of further monetary stimulus

Joseph Trevisani: Over the past two years, markets got used to good to excellent labor markets, I agree NFP did stop affecting markets as it had, but mostly from habituation.

Valeria Bednarik: My take is that a reading above that 4.8 million revision is needed to shake markets and boost the dollar. Regardless that I agree with you that revisions are worthless, yet it's the number in the market's mind, and the number to beat

Joseph Trevisani: Yes, it might, or at least it would halt the fall. Markets have run with the idea that the US reopening has caused a serious economic problem

Yohay Elam: Markets have run on Fed fuel, and vaccine hopes. How would the market react to a negative NFP figure?

Joseph Trevisani: The verdict is out on that, but I think traders will make the usual judgment on forecast vs actual.  In this case, my guess is over 3 million provides good dollar support. It would be combined with the better claims number. If worse than expected, sell the dollar. It would confirm the economic damage thesis.

Yohay Elam: The latest initial claims figures are for the week ending July 31. Continuing claims are for the week ending July 24. The NFP surveys are held on the week ending July 17. So, I think claims are pointing lower, but perhaps there will be an upward revision or a strong figure in August, based on this latest release. As we speak, gold is surging to a new high of $2,066 and FXStreet readers have shown interest in the precious metal. How can the NFP impact the precious metal? Or is it in a world of its own?

Joseph Trevisani: Gold is interesting. I don't think it is a traditional inflation hedge this time.

Valeria Bednarik: Well, dollar's weakness is for sure helping gold run. I don't see the metal giving up on a positive surprise, but for sure accelerating its advance of a negative one. Fundamentals are better when they are aligned with the trend. 

Joseph Trevisani: You are right. Since gold is priced in USD like WTI tends to rise as the dollar weakens. If the dollar reverses we will see if it a simple translation effect or something more

Yohay Elam: Indeed, always essential to remember in what currency the commodity is priced

Joseph Trevisani: It may be just an alternative bet against the US. With equities having had such a strong recovery regardless of the reason, traders are looking for opportunities.  Might commodities and commodity currencies be next?

Yohay Elam: Indeed, it seems like there is a flock looking for the next big thing. Our colleague Tomas told us that several prominent cryptocurrency influencers began talking about small-cap stocks. Any NFP guesses?

Joseph Trevisani: 3.5 million

Valeria Bednarik: My take is that we are going to see something around 1 million. bad, but not too bad

Yohay Elam: I'll be the pessimist with an increase of only 0.5 million. We'll know in less than 24 hours...