What if the US nonfarm payrolls misses 200K?

UK retail sales paint the FTSE in red
by Ipek Ozkardeskaya

The relief rally in the European equity markets remained short-lived. The enthusiasm following Draghi’s dovish take on the monetary policy directs the capital back in the European sovereign bond market. Given that the ECB’s growth and inflation forecasts have been revised to the downside, it is almost a given that the QE program will need to last longer than September 2016. This gives a very good reason to rush back in the Eurozone sovereigns as the capital gains will profit the first comers and investors look for less risky alternatives to park their money in the current environment of outrageous volatility.

The DAX gap opened at 10216.17 hence erased the post-Draghi gains in a single move. The FTSE stocks traded 1% down on the back of a report that showed that the UK retail sales recorded the biggest decline since the beginning of the financial crisis in November 2008.

No wonder why the retail sector is struggling in London this morning. The effect of seasonality may have played a role as the summer flees naturally hurt the retail-related activity across the country. Nevertheless the global murky sentiment points at rising challenges ahead of retailers in getting the irresolute consumers spend their money.

As the retail sales painted the UK stocks in red, the defensive stocks and gilts should continue attracting the majority of the capital flows before the weekly closing bell.

LCG’s Sales Trader Lewis Sturdy highlights the impact of the stronger pound on UK retailers. Today’s equity highlights:

GVC (-1.8%);
Bwin.Party (+2%);
888 (-4.8%);
British online gaming and sports betting company GVC Holdings Plc have agreed to buy Bwin.party Digital Entertainment Plc for roughly 1.12 billion pounds in cash and shares. They out fought a four-month battle with 888 Holdings Plc to acquire the online gaming company.

Astrazeneca; (unch)
The British-Swedish multinational pharmaceutical company said the U.S Food and Drug Administration had approved a new dose of its blood thinner, Brilinta, for patients with history of heart attack beyond the first year.

Retail Sector;
Next; (-3%),
Debenhams; (-2%)
UK August retail sales posted a worse sales decline than since the beginning of the global financial crisis in November 2008. A strong pound has hurt the high street as consumers look abroad and tourists are less willing to spend.

What if the US nonfarm payrolls misses 200K?
by Ipek Ozkardeskaya

The US economy added 190’000 private jobs in August. This does not only represent a 10,000 gap on 200,000 expectation, but also points to a possible softening in private employment trendline. Over the past six months, June was the only month during which the ADP print exceeded 200,000.

Empirically, the 12-month correlation between the ADP and nonfarm payrolls has been less than 50% and more importantly lacking the stability that would permit any real gravitas. This means that the ADP report, usually released on the first Wednesday of every month, has served as a vague indication for the nonfarm reports ordinarily due on the following Friday. Nevertheless, the 12-month rolling correlation has shifted higher and stabilized at about 60% since the beginning of the year. The significance of the latter statistic is open to discussion but could nevertheless merit deeper thought. In fact, there might be a stronger, common explanatory factor, or factors, that explains the parallel weakness in ADP and NFP reads. The slide in oil and commodity prices and the economic slowdown in China are the first external variables that one could think of.

In fact, numerous endogenous variables could also explain the drag in number of employees joining in or returning to the labour market each month. The slack in the labour market is not about the quantity of new jobs but also about the quality. Hence the actual number of new jobs should be analysed alongside with the improvement in wages, the percentage of the active population and the employee turnover. Although the improvement in wages is still not at desirable levels, the percentage of the working population shrinks due to structural changes.

This being said, the slower pace of employment could be perceived as a sign of stability, but also as an existence of an alternative for the remaining employees who could ask for a more adequate yet a more difficult-to-obtain job. As the level of sophistication rises, the ADP and NFP reports may only serve as a minor indication of Fed’s policy outlook.

Market expectations remain the major driver of the short-term market dynamics and the US jobs data is irrefutably the preeminent moment to re-shape the Fed expectations. In this context and as Friday’s NFP read is the last labour market data before the very much expected FOMC meeting in September 16-17th,market volatility will certainly rise to significant levels.

The general expectation for August employment data is rather gloomy. The consensus is 218K new nonfarm jobs in August versus 215K last month, lower than the 12 month average of 242K. Hence, there is room for disappointment which could further curb the appetite in US dollar and keep the US yield curve downcast until the FOMC meeting in September.

A read between 200-245K should keep the base case scenario for a December hike from the Fed. A read below the psychological 200K threshold could revive the Fed doves and push the Fed rate rise expectation later to 2016. While a read above 245K will bring speculations of a September hike back on the table.