Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 07 April 2017 at 4:57 GMT

3 Numbers: Upbeat ADP jobs report points to a solid US nonfarm figure

Blogger / MoreLiver's Daily
  • Germany's mediocre industrial output growth may be disappointing
  • Britain's industrial production growth has slowed after outsized gains
  • US payrolls expected to increase 175,000, but well below ADP's 263,000 figure!
  • There is little chance of a bad jobs report that could upset the Fed's rate plans
  • Stockmarkets may have finally noticed that the Fed is tightening
By Juhani Huopainen

Germany February Industrial Production (0600 GMT). Industrial production is expected to have decreased by 0.3% from month ago, after rising 2.8% in February. Investors could begin to doubt whether high sentiment indices are simply overblown expectations, and conclude that hard data will not follow the release of soft data.

This discussion of disappointing hard data had already started in the US, and is bound to come to Europe. So far, only a couple of investment banks have warned about this in Europe. Most commentators assume that the hard data will be a positive surprise and that upbeat soft data will revert to longer-run averages.

It would be wrong to blame any dip in UK industrial output on Brexit, as investment has been surprisingly strong despite the uncertainty about the UK leaving the EU. Photo: Shutterstock

I tend to be sceptical of survey-based measures. While they do correlate with economic activity, they often tend to be very wrong at more extreme levels. In fact, high economic sentiment indices tend to be followed by below-average stockmarket returns. This could be the result of hawkish monetary policy adjustment after a batch of good data, or alternatively, good surveys leading to early pricing and then disappointment as the hard data fails to meet inflated expectations.

Just to illustrate the point, see the following chart showing the Eurozone economic sentiment index and the DAX index. Note that being long in stocks at high survey index levels often leads to lousy future returns.


Chart source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more.

Also France’s industrial production index will be published at 0645 GMT.

UK February Industrial Production (0830 GMT). Industrial production is expected to have declined 0.1% from month ago. In November and December the monthly growth rates were very high, and after a slow January, a slow February would still have to be considered as reverting to the mean. It should be emphasized that the expectation is that industrial production has grown 3.7% from a year ago. 

Of course, Brexit uncertainty does play a minor role here, and headline-hungry editors will probably link these two issues together. But that would probably not be a good idea – business investment has been surprisingly strong despite the “uncertainty”.

US March Employment Report (1230 GMT).  After another better-than-expected jobs report in February, investors are again expecting mean reversion and a somewhat slower pace of jobs creation in March.

The median forecast for the March payroll increase is 175,000 – less than the 235,000 in February, but well within the range we’ve seen during the mature phase of the economic recovery.

US payrolls

Chart source: Saxo Bank
The headline unemployment rate has been falling consistently since the recovery started. Meanwhile the wider U6 unemployment rate, which includes both unemployed, discouraged workers and those with part-time jobs who want to work full time, has been stuck around 9% for a while, as shown in the following chart.

US participation rate

Chart source: Saxo Bank

As the labour market continues improving, wages are bound to begin increasing as labor demand increases while qualified supply is limited.

That is the key measure that the Federal Reserve will be watching, and as the relationship is not instantaneous, the Fed will look at the overall tightness of the labour market and assume wages are going to get higher.

US wages

Chart source: Saxo Bank

There is very little chance that the jobs report could be so “bad” that the Fed would consider slowing down on the rate hikes. In fact, the Fed is more likely in the mood that it will tighten when it sees the opportunity to do so. As stock prices are relatively high and the economy looks healthy, the Fed’s reaction function is likely to be unsymmetrical.

A good report could see the Fed moving ahead more aggressively with balance sheet reduction plans and hike rates once per quarter. A single bad month would not change that plan for slow but steady tightening, and even a string of bad reports would probably only push the balance sheet reduction out to 2018, but still the Fed would bring in two rate more rate hikes in 2017.

The ADP survey, which was published earlier this week, showed the private sector has added 263,000 jobs. This was much more than was expected and the highest monthly increase since 2014. After the release, US stock market rallied, but the rally was ended by the Federal Open Market Committee minutes, which suggested willingness to reduce the size of the balance sheet and proceed with the rate hikes.

Other measures from weekly jobless claims to purchasing manager indices suggest a lower payroll increase than in February. This is probably why people are not “buying” the ADP-report fully. It is also a reason why investors could be again surprised by a strong jobs report, even though the situation is practically identical to March.

The monthly numbers are very volatile, but I do see a risk that the payroll increase will again come in way above the median forecast. As soon as investors had recovered from the FOMC minutes, they could get another jolt today from the jobs report. The knee-jerk reaction would probably be expectations of a more hawkish Fed.

For more on forex, click here.

– Edited by Robert Ryan

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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