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Look-ahead to US Non-Farm Payrolls

Market Update

Look-ahead to US Non-Farm Payrolls

This Monday saw the first full trading session of the New Year. It began bullishly enough with European and US stock indices pushing sharply higher in a move which saw the US majors, along with the German DAX, hit fresh all-time highs. However, a rush of selling emerged soon after the US equity markets opened for business. This led to sharp price reversals across the board with all the major US indices ending the session down more than 1%. The S&P 500 recorded its first negative start to the year since 2016.

Senate surprise

There was some consolidation on Tuesday, but Wednesday morning saw the tech sector take a bashing as the votes were counted in the US Senate election run-off in Georgia. Unexpectedly, the two Democrat candidates took leads over their Republican rivals. It was subsequently confirmed that the Democrats had won both seats which means that the Republicans have lost their Senate majority. Now the Senate is split 50:50 between the two parties. This means that Vice-President elect Kamala Harris now holds the deciding vote whenever the Senate splits down party lines, giving the Democrats a clean sweep of the Presidency, Senate and House of Representatives. This unnerved investors in tech stocks on concerns that the Democrats will now be able to follow through on threats to impose regulations and levy additional taxes on the sector. But the less tech-heavy Dow Jones Industrial Average rose on the news, as the flip side to the Democratic clean sweep is the prospect of further large dollops of fiscal stimulus.

The rally resumes

In fact, by Wednesday’s close, US stock indices had shrugged off any concerns about higher taxes and tougher regulations. They stormed higher as investors looked forward to a period of increased spending under the Democrats. Equities got an additional boost following the release of minutes from the US Federal Reserve’s last monetary policy meeting in mid-December. These showed that members of the Federal Reserve were optimistic over the resilience of the US economy, and pleasantly surprised by a stronger-than-expected recovery, amid the ravages caused by the ongoing coronavirus pandemic. Despite this, the Federal Reserve seems in no hurry to tighten monetary policy, although the minutes made it clear that there would be a tapering of its monthly bond purchase programme before any increase in interest rates.

What about jobs?

There’s no doubt that the US central bank will continue to keep a close eye on the economic data. In that regard, tomorrow brings the first big economic release of 2021, the US Non-Farm Payrolls for December. The consensus forecast is for a payroll increase of 65,000 jobs. If accurate, this would be the lowest level of gains since last April’s disastrous loss of 20.54 million jobs at the height of the pandemic. However, some analysts are predicting that the number could be considerably worse. This follows yesterday’s release of the ADP Non-Farm Employment Change for December. This is a private survey and is generally unreliable in helping to predict how the official Non-Farm Payroll number will come in. But it tends to be far less volatile than the government’s data on a month-by-month basis. Consequently, when the ADP number comes in significantly above or below the consensus expectation, analysts take notice. Yesterday the ADP payroll showed a loss of 123,000 jobs in December. This was a long way below both the forecast of a 60,000 gain, and November’s increase of 304,000. It was also its first decline since April last year at the height of the pandemic. Overall, the US lost over 21.5 million jobs at the beginning of the pandemic. Since then, we’ve seen cumulative payroll gains of around 12.24 million, so even with a positive number on Friday there’s a shortfall of 9.26 jobs since the economic effects of the pandemic hit in March and April last year.

Low expectations

Investors are bracing themselves for another bad number on Friday. The big question is how markets will react. Job losses are a disaster on a personal level and an obvious signal that the economy is doing badly. But they can also trigger a response from government and central bankers. In the past we’ve seen equities rally after bad job numbers on the hope that further monetary and fiscal stimulus will be made available. But will such hopes be enough to propel the major US stock indices to fresh highs this time round? We’ll find out soon enough.



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