As usual, payrolls is going to dominate

Outlook:

Today will consist chiefly of waiting for tomorrow. There’s probably a country song in there. As usual, payrolls is going to dominate. While the overall big picture is not much in doubt—job growth is good and it’s wages and household spending that lag--we do have contradictory indications and some real rays of light.

For one, ADP reported its estimate for private sector payrolls at a measly 156,000 (and revised March down from 200,000 to 194,000). Evidently, according to Market News reporting on a RBS note, weekly unemployment benefit claims are incorporated into the ADP forecast. Claims have lately been extremely strong—at the lowest for decades—and so today’s unemployment claims report might have some value.

Estimates for tomorrow’s payrolls include 202,000 (Reuters) and 205,000 from a range of 170,000 to 250,000 (Market News). But if it’s compensation that counts, Market News reports that Barclays judges the recent productivity report as favorable—“Despite slow output growth, employee hours and payrolls grew and labor compensation grew, with compensation per hour up 3.0% q/q saar and 2.8% y/y. Annual growth in nominal unit labor compensation has been trending higher since the beginning of 2014 and we expect further tightening in labor markets to support a continuation of this positive trend."

Note that it’s hourly compensation rising at an annualized rate of 3%. And the negative productivity numbers added to actual cash compensation gains makes unit labor costs jump to 4.1% annualized in Q1. Nobody is saying so, but doesn’t this imply upward price pressure? It’s funny that a bad number—negative productivity—can have a favorable effect or at least the effect the Fed is looking for—inflation pressure.

But while some analysts see a glimmer of a hint that the payrolls report won’t be bad or shouldn’t be interpreted as bad, most are girding their loins for a negative shock. A good number is not being priced in to Fed funds futures, either. The FT reports “Futures markets are pricing in just a 10 per cent chance of the Fed hiking by 25 basis points at the June meeting and only 52 per cent for an increase in December. Short-term government debt reflects this expected flatter monetary tightening trajectory. The 2-year US yield, which moves inversely to the bond price, was above 1 per cent in March and is now 0.76 per cent.”

The market says the Fed will barely get one hike in before year-end and that one late in the year, while the Fed is still saying two hikes this year. That disconnect is stunning. The Fed had better say something PDQ to alleviate the tension between the two outlooks.

So here we go again. If the jobs report tomorrow is low vs. the consensus forecast, say 150,000 vs. 200,000, the dollar spikes lower on expectations of a longer Fed hold. If it’s on the mark at 200,000, the dollar will still get sold off because the overall ruling sentiment is for the Fed to say on hold. But what if payrolls is 250,000, the top end of the Market News survey range? Does the dollar gain? Yes, probably, but only if compensation is also stable or higher.

No matter the number, we will get spikes in both directions. Retail traders simply cannot win on payrolls morning. The brokers know where your stops are and can be counted on to shove prices past them. It happens every time.

Tidbit: The trade report is worth talking about for once. Conventional economics has it that an overvalued currency will be reflected in falling exports and rising imports for a net trade deficit. Deficits are supposed to be a clarion call for devaluation—but of course, they may also reflect a ton of factors other than currency level, including quality (which is why Germany gets surpluses no matter what) and foreign demand based on foreign growth or its absence, something that can be constrained by tariffs and taxes. Besides, falling imports may imply slowing domestic growth and have nothing to do with the currency level.

This time the US trade deficit for March contracted 13.9% m/m to $40.44 billion from $46.96 billion (revised) in Feb, quite a drop. Exports fell 0.9% but imports fell by 3.6%, with the dollar value of imports at the lowest since Feb 2011. And it wasn’t just oil, although oil imports were the lowest since Sept 2002. Consumer goods imports fell, too. As for exports, some categories had the lowest numbers since 2010, including food and beverages and industrial supplies.

For the first quarter, exports fell 5.4% and imports, 4.5%. The WSJ reports the Commerce Dept reckons the trade deficit subtracted 0.34% from first quarter GDP, which was a crummy 0.5%. In other words, GDP would have been 0.84% if the trade deficit had not been so big. Therefore, a drop in the trade deficit should have the effect of removing a negative. A huge drop in the level of the dollar would not necessarily shove exports so high that the deficit would shrink by significant amounts for a lasting period, but the dollar’s retreat in Q1 shows the currency level can be helpful. Not decisive, but helpful. The US likely can’t get a giant export gain even on a super-cheap dollar chiefly because of unfair trade practices in some major trading partners, notably Japan and China.

Where is the “So what?” Well, the situation is murky and befuddled by political considerations, but we would not be surprised to see the current Administration beef up its anti-unfair trade rhetoric and actions. Obviously the voters want a more proactive government. Trump won the GOP nomination not only on racist views, but on a promise to re-negotiate the trade deal with China. Never mind that we don’t have a trade deal with China, another one of Trump’s many factual mistakes.

We adamantly insist that the Treasury (or the Fed) has no plan whatever to drive the dollar down to get a favorable trade effect. But the politicos can beef up fair trade efforts. Despite all appearances, politicians are not stupid. The Republicans may wish to deny the president any credit for improving trade, but the president has quite a lot of executive authority leeway. The WTO is not working out so well for the US, so maybe it’s time for some other action. Stay tuned. It has been a long time since trade had a strong or immediate effect on the dollar.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	107.26	SHORT USD	WEAK	04/29/16	107.07	-0.18%
GBP/USD	1.4476	LONG GBP	WEAK	04/12/16	1.4309	1.17%
EUR/USD	1.1432	LONG EURO	WEAK	03/11/16	1.1094	3.05%
EUR/JPY	122.61	SHORT EURO	STRONG	05/02/16	122.33	-0.23%
EUR/GBP	0.7896	SHORT EURO	STRONG	05/02/16	0.7864	-0.41%
USD/CHF	0.9626	SHORT USD	WEAK	04/29/16	0.9632	0.06%
USD/CAD	1.2849	SHORT USD	STRONG	02/01/16	1.4031	8.42%
NZD/USD	0.6883	LONG NZD	STRONG	02/01/16	0.6478	6.25%
AUD/USD	0.7475	LONG AUD	WEAK	01/25/16	0.6980	7.09%
AUD/JPY	80.17	SHORT AUD	STRONG	04/02/16	81.17	1.23%
USD/MXN	17.7619	SHORT USD	STRONG	02/23/16	18.1208	1.98%