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Non-Farm Payrolls: How will markets react to record job losses?

May 5, 2020
The damage caused by the coronavirus lockdowns will hit home hard on Friday with the release of the monthly US jobs report and unemployment data.

There is no doubt there will be record-breaking negative numbers, but the market expects worse to come next month.

Another ‘where were you?’ moment may be upon us as non-farm payrolls are set to decline by around 21 million in just one month, causing the unemployment rate to skyrocket to 15%+. This will shatter the post-World War Two record of 10.8% touched in November 1982 and effectively wipes out every job created in the US in the past ten years since the Great Financial Crisis. In March, the jobless rate shot up 0.9%, the largest monthly change since January 1975, to 4.4%. Underemployment will also be rampant across the economy given the adverse effects of the shutdown.

Markets already shocked by jobless claims

Of course, the weekly initial jobless claims have in effect been the new ‘NFP’ and the most timely data point through the crisis. As lockdown measures have spread so layoffs have multiplied to industries that were not initially directly impacted by business closures and disruptions. Over 30 million Americans have now sought unemployment benefits over the past six weeks, equivalent to nearly one out of every five workers losing their job in just over a month. But it is important to remember that the figures in the NFP report are in a similar range to this weekly data and the market is expecting historic losses on Friday.

The weekly continuing claims data has also been closely watched to get a better sense of the depth of the labour market downturn and the ballooning joblessness rolls imply a spike in the unemployment rate.

Risks to the downside through to mid-year

Further declines are expected in May and June as the data for Friday’s monthly report was collected up to the week of April 12, when the claims figures were ‘only’ at 22 million. So, there is likely to be another 10 million unemployed in the next report released on June 5, pushing the unemployment rate to over 20%. We note the peak US rate experienced in 1933 was 24.9% and that the unemployment rate is derived from the household survey which is more volatile than nonfarm and employer’s surveys. Markets will also be conscious of revisions given that most of the shock to March’s payrolls occurred after the initial nonfarm reference period for that month.

3,000 in the S&P?

With expectations for catastrophic numbers already, markets are looking ahead to the easing of lockdown measures and reopening of the economy. The Fed’s backstop via asset purchases, with recent estimates amounting to near 28% of the S&P 500, is immense. The nagging question is still how long can dire economic news be offset by central bank liquidity?

Stock market bulls will seize upon any new chinks of light and hope to push the S&P through strong resistance around the psychological 3,000 level, which also houses long-term moving averages. The flip side sees the dollar bid and the ‘pain trade’ take a turn with support below at 2787 and 2726.

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