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Non-Farm Payrolls: 30million jobs lost, but the market isn’t bothered

4 Jun 2020
The highlight of the US data calendar should be the monthly US employment report for May, due out on Friday, which will once again show the damage caused by the coronavirus shutdown.

However, there should be an easing of job losses after last month’s spike and the May 12 cut-off for the report points to these figures not considering any easing or re-opening measures in the second half of the month so is slightly old news.

Staggering numbers improve

The consensus expects another large drop in the headline figure – down by 8.3 million - which will bring the total number of jobs lost to over 30 million since February, after the historic loss of over 20 million last month. Another rise in unemployment will see the rate push higher to near 20%. The jobless rate is derived from the household survey which is more volatile than non-farm and employer’s surveys. Unemployment printed at 14.7% in May’s report, beating the post-World War Two record high of 10.8% in November 1982, while the rate hit 24.9% in 1933.

We note that last time, the participation dropped to just above 60%, its lowest reading since January 1973 and the employment to population ratio dropped by 8.7% to just above 50%, the lowest rate and largest fall ever. This means that less than half of the working age population will actually have earned a wage in May.

It is also worth highlighting that average hourly earnings will jump again (up 4.7% last month) as the data is skewed higher by disproportionate job losses among the lower-income groups in retail, hospitality and leisure sectors which distorts the average.

Jobless claims point the way

As we wrote in last month’s preview, the most timely employment data has been released every Thursday in the form of the initial jobless claims and the continuing claims. The former is continuing to recede with the eight-straight week of declines after hitting a peak number at the end of March.

Continuing claims have been closely watched to get a better sense of the depth of the job market downturn and they are expected to remain high as the pace of rehiring is still expected to be gradual. In some part, this is due to small businesses struggling to viably reopen as nearly 70% of benefit recipients are actually receiving a higher income than normal with this Federal Government boost expected to last until the end of July.

Today’s much smaller than expected decline in ADP payrolls may give us an advance clue of the headline print as the estimates for April were close to one another. That said, ADP’s guide to predicting non-farm jobs is historically poor.

The most hated rally in history

Economic data has mostly been ignored by the market recently with the record-breaking awful figures signalled in advance. The Fed’s liquidity backstop means further positive signs in employment may set the stage for more upside in stocks. The most hated rally in history (v.2) is only 10 weeks old but continues to ignore low bond yields that imply a comatose economy for years to come and expensive stock market valuations.

For the heavily sold greenback, a weak report may just be shrugged off in the broader sell-off that we’ve seen recently. Price action over the last few weeks underscores building downside risks for it in the longer run, with the loss of supporting growth and yield differentials.

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