US ADP April Employment Change Preview: Job losses are known unknowns

The track of the coronavirus pandemic in the US shifts to new labor statistics this week but the main question is not the job losses themselves, which are already well documented, but how markets will react to known information in new packages.

Private payrolls at Automatic Data Processing (ADP) are forecast to drop 20 million in April.  To say this is the largest decline in history is to understate the impact.  It took 108 months, nine years for those same companies whose employment books ADP keeps to amass that many new employees. In one month nine years of labor market success will have disappeared.

ADP payrolls

Non-farm payrolls on Friday is also expected to shed 20 million workers and the unemployment rate is forecast to jump from 4.4% to 14%.

Some portion of those lost employees will be rehired, perhaps in the next few weeks as various states start to lift their restrictions on business closures.  Others will have to wait months for their jobs until business recovers and still others will have to find new work in a market flooded with the unemployed.

Market reactions

The scope of the employment debacle caused by the business closures has been known for more than a month.

It began on March 26 when initial claims of 3.283 million (revised 3.307) more than tripled the 1.0* million forecast. The following week April 2 analysts again underestimated the extent of the job losses when 6.648 million claims (revised 6.867) almost doubled the estimate of 3.5 million. By the third week of the layoffs April 9 economists were getting closer, predicting 5.250 million and getting 6.606 million (revised 6.615).

The last three weeks have seen a spread between estimate and data about double what it was in six weeks from February 6 to March 19-5.93% vs 2.55%: 5.245 million (revised 5.237) on a 5.105 million prediction on April 16; 4.427 million (revised 4.442) with a 4.20 million estimate for April 23; last week April 30 had 3.839 million at a 3.50 million projection.

Initial jobless claims

All told 30.307 million have been laid off in six weeks, an economic, cultural and personal catastrophe without historical comparison.

Equity, currency and credit markets in the US were pricing the debacle before the employment data had been issued. The Dow and S&P lows were on March 23. The dollar’s risk aversion high against the euro was on March 19 and versus the yen on March 23.  The low yield and high price for the 10-year Treasury was on March 9.  

Since those extremes each market has reversed. The Dow is up 25% from that March date, the dollar has lost 2% against the euro and 4% versus the yen and the 10-year yield is up 13 basis points to 0.63% despite the Fed’s $500 billion purchase program.

Even as the jobs losses have continued to mount markets are looking ahead to the scope and speed of the recovery.

Conclusion: Can a disaster be priced?

In a situation like this where the economic statistics are without historical example how do we judge the potential market reaction?  Will the first ADP and NFP releases at these astronomical levels shock markets as the initial claims numbers did in March?  Or has the ground been prepared by six straight weeks and 30 million claims.

The answer to the title question is yes, disaster can be priced. The same parameters of forecast and release will play for this week’s numbers. 

These ADP and NFP forecasts are not based on the type of guesswork that went into the first claims figures in late March and early April. There is hard data and six weeks of claims for analysis and estimation.

If the forecasts are accurate markets will react as they do to most expected information.

The ADP and NFP figures will not be presenting new results. It is essentially the same information as in the claims numbers. Though the magnitude of the job losses in the ADP and NFP reports will be beyond anything markets have experienced in the past, they will not be a surprise.

The market reaction dynamic for statistics is the tension between the forecast, which is priced into trading levels, and the reality of the data. Surprise drives movement not the absolute size of the number.

As catastrophic as the ADP and NFP numbers are for the economy, they are, for the markets, a known commodity. The corollary for the dollar should be standard-- a lower than forecast number providing support and a worse than anticipated figure prescribing weakness. 

*Estimates from the Reuters survey of analysts and economists. Dates are release dates for the prior week’s information.