For markets, today is employment day. The US publishes its monthly jobs growth estimate. This indicator could regain its lost glory this month as the economic indicator that provokes the most volatility in the markets. Strong data this time will confirm an imminent tightening of the Fed’s monetary policy, then risk triggering a significant reassessment of the value and prospects on the financial markets.
Average forecasts suggest employment growth for July near 900k against 850k a month earlier and a drop in the unemployment rate to 5.7% from 5.9%. Such an increase would be the largest since last August due to a return to the old normal.
The degree of uncertainty rose this week due to conflicting labour market signals from other indicators. The ADP estimated private-sector employment growth of only 330K for July, putting the entire economy at over 400k new jobs.
However, such weak estimates didn’t get confirmation by other indicators. The Non-manufacturing ISM rose to 64.1 last month, the highest reading in the index’s history since 2008. Not least of all, the increase in the index was attributable to employment.
The weekly jobless claims performed well. Their dynamics we consider as the closest to the official monthly employment figures. Initial claims fell to 385K following a jump in the previous two weeks, and the number of continued claims fell by 366K over the week to 2.93 million – a new low since the pandemic’s start. There has been an acceleration in the recovery, rather than a plateau as in previous months.
The service sector is speeding up the recovery. And that is good news as services represent up to 80% of the US GDP.
The big question for the markets is whether these changes are positive. We can expect relatively calm markets if employment growth is in the 100-150k range to the forecast. This will spur speculation that the Fed will reduce the monthly volume of asset purchases on its balance sheet someday before the end of the year.
If the job growth is much greater than 1 million, the reaction of the world and especially the US markets could be much more chaotic. The expectation is that tapering will start in September will become mainstream, which will lead to a boost in the Dollar and an increase in medium-term interest rates. And this promises to be the trigger for a correction in the stock markets.
For the Dollar, it will be a new high. It could not only return to growth and break the resistance of its sideways range, but it could launch a powerful multi-month rally, sweeping away the weakest competitors, starting with emerging market currencies and many commodities.