One Last Thing before the Week is Over

The US employment report stands between us and the weekend.  With parts of Asia and nearly all of Europe closed, participation is obviously considerably lighter than normal. This coupled with significant positioning can make for dramatic moves.  

At the same time, there is an asymmetrical risk.  A robust report does not change the status quo.  The relatively steady improvement in the labor market has not prevented scaling back of Fed hike expectations. Another strong report is unlikely to persuade the market that a June rate hike is more likely.  A weak, however, could push market sentiment away from a September hike.  

The weak ADP estimate and soft employment in the ISM manufacturing survey warn of the risk of disappointment with today’s report.  At the same time, the weekly jobless claims continue to point to an improvement in the labor market.  Continuing claims are at new cyclical lows.  

Even though the ADP estimate does a fair job tracking the broad trending the non-farm payroll series, on a month-to-month basis, there are notable discrepancies.  Indeed, in four of the past six months, the ADP's first estimate was lower than the BLS estimate.  The average miss was 65k  over those four months and 40k over the entire six month period. 

Fed Chair Yellen has helped shift investors' focus from emphasizing unemployment rate, which has steadily fallen quicker than the Fed expected, and toward a wider range of measures. Yellen often has cited data from the JOLTS report, and the Federal Reserve has created a new measure, the Labor Market Conditions Index, both of which will be reported next week.   That said, although the consensus does not expect it, there is some risk that the unemployment rate ticks down to 5.4% from 5.5%.   The participation rate itself continues to bounce along the cyclical trough near 62.7%--62.9%.  It has not been above 63% since last March.  

Compensation has also become a more salient part of the labor report.  However, to be clear, Yellen has indicated that she could favor a rate hike before hourly earnings accelerate.  The bar is "reasonable confidence" that it will take place, not that it is. Several cities and states have raised minimum wage this year, and for some locales are phasing it in with additional hikes coming into effect this month.  Moreover, the competition for low skilled work has risen, driving Walmart, TJ Maxx, Target, and McDonalds to announce wage increases as well.  The impact on the national hourly earnings figures will be relatively small. 

In terms of the foreign exchange market proper, after large trend moves in Q1, we expect broad trading ranges to dominate in the first part of Q2.  For the euro, the $1.0680-$1.0700 represents the lower end while $1.10-$1.1050 is the upper end.  The dollar looks confined to a JPY118 to JPY121 range.   

Sterling is in a $1.46-$1.50 range.   Last night's television debate does not appear to have been a game changer, according to various post-debate polls.  A high level of political uncertainty remains for the election a little more than a month away.  The issue is not just that a coalition government is necessary, but that it is difficult to see how a majority government can be cobbled together.  Meanwhile, while the economy appears to be chugging along, the UK is on the cusp of deflation.  

The only other economic data reported today of note was HSBC's service sector PMI for China.  It rose to 52.3 from 52.0.  However, new business fell to an eight month low, and employment fell to a ten month low.  The official measure was reported earlier this week, and it slipped to 53.7 from 53.9.  

Owing to the holiday, the full reaction to the framework agreement with Iran has not been seen though oil prices fell immediately in response. The three big components are a clear enrichment schedule, at a single site, with full monitoriing access for the next 25 yerars.  Israel and Saudi Arabia have been critical, which is not unexpected.  Sanctions on Iran will not be lifted not only until a final agreement is reached (June 30 is the new deadline), but after the implementation is verified.  The US Senate, whose approval is necessary, is a wildcard in this process as well.