After a volatile week, brace yourself for more fireworks as we look forward to the release of the April 2021 non-farm payrolls report later today at 13:30 BST.
In recent days, investors have been piling into risk-sensitive assets, including commodities and value stocks and anything that relies on economic growth. Indeed, the Dow surged to a fresh record high as more signs of an improving economy emerged, with applications for unemployment benefits falling last week to a fresh pandemic low. But on Thursday, the tech sector also found renewed strength as yields dipped on the back of dovish remarks from several Fed officials who have moved to alleviate speculation over monetary tightening amid rising inflationary pressures.
Heading into the NFP, the key question for stock market participants would be this: will the Nasdaq be able to extend its gains even if today’s jobs data triggers a bond market sell-off and cause yields to rebound? Remember, rising yields have not been a great sign for the over-stretched tech sector in recent past, so make sure you are taking extra care if you are going to be trading the Nasdaq or tech names today.
Here is what economists expect:
- Non-farm jobs: 990K to 1 million expected vs. +926K in March. Most analysts expect a large number with the highest estimate being as high as +2.1 million(!) and lowest around +700K. The average estimate is +1035K with a (very high) standard deviation of +203K.
- The unemployment rate is expected to have dropped to 5.8% y/y in April vs 6.0% in March. The participation rate is seen edging higher to +61.6% vs 61.5% last
- Average hourly earnings are seen flat month-on-month, with y/y expected to be -0.4% y/y vs +4.2% prior
NFP leading indicators
The key NFP leading indicators we monitor have been mixed, which may suggest the above expectations will not be met. However, with many states re-opening in April and companies eager to make profit ahead of the summer months, I think we may get a number close to consensus this time.
- ADP +742K vs +850K expected and 565K last (negative)
- ISM services employment 58.8 vs 57.2 prior (positive)
- ISM manufacturing employment 55.1 vs 59.6 prior (negative)
- Initial jobless claims survey week 566K vs 765K in March (positive)
- Challenger Job Cuts 22.9K vs 30K prior (positive)
Likely market reaction and NFP trade ideas
- Value stocks: With expectations running quite high, there is scope for disappointment if they are not met. However, a small miss shouldn’t derail the rally as it would keep the goldilocks scenario intact. And if expectations are met or surpassed then growth stocks should be able to rally sharply.
- Growth stocks: May be able to extend their gains even if today’s jobs beats so long as wage inflation doesn’t show unexpected strength to raise inflation concerns. However, if the data triggers a bond market sell-off and cause yields to rebound, then we may see renewed pressure on the tech sector. Remember, rising yields have not been a great sign for the over-stretched tech sector in recent past.
- Dollar: The greenback may pop higher initially on the back of a stronger number. But with investors so focused on the growth story, a strong NFP print and a flattish average earnings number will probably send commodity dollars higher (remember that the Canadian employment data – expected at -162K – will also be released at the same time, if you are trading the USD/CAD). A strong NFP print and an unexpected jump in wages may however cause a more positive reaction for the greenback – especially against currencies where inflation is not a concern, such as the Japanese yen and Swiss franc.
As well as the headline NFP print and wages, it is also worth watching participation closely. The Fed has indicated that it wants to see Americans who are in working age to be encouraged to seek employment and back into the workforce before it thinks about tightening its belt.
