Yesterday’s US ADP print was too strong to please the Fed.
And in the middle of tens of thousands of additional job loss news, the NFP data could surprise to the upside, boost the Federal Reserve hawks, send the US yields and the US dollar higher, and stocks lower.
How come the US jobs data remains resilient to job loss news??!
News that Amazon will slash 18’000 jobs and Salesforce will let go of 10% of its workforce – which should be around 8000 job losses, broke earlier this week, giving hope that bad news on jobs front could also be somehow reflected in jobs data.
But no!
The ADP report released yesterday revealed way stronger than expected private job additions in December, posting 235’000 new private jobs last month, versus only around 150’000 expected by analysts.
Zooming in, yesterday’s ADP report revealed that large companies did cut around 150’000 jobs in December, but small and medium size businesses hired relatively strongly… so that we ended up with a strong 235’000 print.
It’s bizarre, no? Inflation, and economic slowdown should hit small and medium sized businesses first. So, why on earth do smaller businesses keep hiring while big companies keep firing? I don’t have an answer to that.
So, today’s NFP read is also expected to reveal around 200’000 new nonfarm jobs in the US – quite a strong figure when you think that recession could be around the corner in the US. Wages may have grown 5% year-on-year – strong enough to threaten inflation, while the unemployment rate is seen steady near 3.7%.
If look back to the historical data, we observe that the NFP figures tend to fall significantly and start giving signs of weakness at least a couple of months before recession hits.
In the US, the data hints at no problem at all – which is a big problem for the Fed, per se.
As a result, stronger-than-expected jobs data will certainly boost inflation expectations, bring the Fed hawks back to the market, send the US yields and the dollar higher, and stocks lower.
Pricing in Fed funds futures still points at a 25bp hike in Fed’s next monetary policy meeting, meaning that we could rapidly see the pricing turn in favour of a 50bp in case of a strong jobs data.
Markets
Market reaction to yesterday’s unwelcome ADP jobs data weighed on equity indices. The S&P500 slid 1.17%, and Nasdaq lost 1.60%. The US 2-year yield rebounded on hawkish Fed expectations and the US dollar index advanced 0.85%, despite the death cross formation on the daily chart, where the 50-DMA crossed below the 200-DMA confirming the bearish trend.
Gold retreated to $1825 per ounce on the back of rising yields and a stronger US dollar, as Cable slipped below 1.20 – and is even testing 1.19 at the time of writing. The EURUSD is drilling below the positive trend base that’s building since November, and is preparing to test the 1.05 to the downside.
For the pound, the strikes in the UK is certainly not good news for the economic growth, but the fact that the government remains ultra-resilient to give people a better pay is a proof that the government remains serious about its high budget discipline, and that’s probably what prevents the Gilt yields and the pound from falling on UK-related news – even though sterling is hit by a stronger US dollar these days.
For the euro, the hawkish European Central Bank (ECB) expectations should normally temper the selloff, but we also know how the hawkish Fed expectations have the power to eclipse everything else… Due today, the Eurozone flash inflation estimate is expected to have slipped below 10%. A softer European inflation could also soften the ECB hawks, but it will hardly change the ECB’s determination to further tighten its policy for now. Therefore, price rallies in euro could be interesting dip-buying opportunities for a further advance to 1.10 against the greenback in the medium run.
