US jobs preview: traders look for signs of economic deterioration and problematic wage growth

The US jobs report on Friday provides markets with a new update on how the economy is faring in the face of inflation and recession fears. The June US jobs report will be released on Friday, July 8 at 1.30 p.m. (UK time). At a time when market participants are concerned about the potential consequences …

The US jobs report on Friday provides markets with a new update on how the economy is faring in the face of inflation and recession fears.

The June US jobs report will be released on Friday, July 8 at 1.30 p.m. (UK time).

At a time when market participants are concerned about the potential consequences of rising interest rates as a result of soaring inflation, traders will be looking for signs of an economic slowdown.

Unfortunately, there is a good chance that many people will interpret this release with a pessimistic slant, because any positive job data could be misinterpreted as short-term strength before the true effects kick in.

With concerns about the economy’s trajectory in the second half of the year, traders will be watching to see if businesses or workers begin to react to the pressures that have been steadily building of late.

Looking at some of the secondary surveys can give us an idea of what we might see when the headline figures come out on Friday.

What do other employment surveys tell us?

It is often useful to look for clues in alternative employment readings, such as the Conference Board Survey, ADP, jobless claims, and ISM manufacturing PMI, before the main event.

First, we can look at the most recent Conference Board survey for June, with the ratio of those finding it difficult versus easy to find work serving as a good proxy for unemployment. As we can see, the conference board ratio has begun to rise in recent months. This represents a significant shift following the declines of 2021. While unemployment has yet to rise, this relationship suggests that it is on the verge of doing so.

Source: Refinitiv

 

ADP payrolls – ADP are taking a break from publishing their employment report, with the firm opting to pause both July and August releases while they reconfigure their methodology.

Initial jobless claims – Initial claims have been on the rise over the course of the past three months, turning the tide on the declines seen throughout 2021. The recent declines seen in the payrolls figure do note that this is feeding through, with rising average initial claims serving to highlight how pressure is gradually building on the US jobs market.

Source: Refinitiv

ISM manufacturing PMI – The June ISM manufacturing PMI saw a sharp decline for the employment element, falling further into contraction territory (47.3). That represents the lowest reading in almost two years. It is evident that the manufacturing sector hiring has come under pressure, signalling the potential for a weak payrolls number. Notably, the NFP forecast does point towards a similar move lower.

Source: Refinitiv

ISM non-manufacturing PMI – Unfortunately, we are seeing that same story play out for non-manufacturing hiring, with the recent figure of 47.4 representing the worst number since July 2020. Again, the relationship with the payrolls figure does point towards declines for the headline NFP figure on Friday as forecast.

Source: Refinitiv

Non-farm payrolls

The headline nonfarm payrolls figure has been declining recently, with the latest figure of 390,000 representing a 13-month low.

However, it is worth noting where much of the weakness has come from, with employment in trade, transportation, and utilities largely declining after February.

Source: Refinitiv

Unemployment

In terms of unemployment, we’ve seen a recent plateau after years of declines. However, the conference board ratio suggests that it will rise in the future. The timing of this is difficult to predict, but it is a data point worth monitoring because markets may begin to gravitate toward riskier assets once we see it turn.

US earnings

Wages in the United States have recently been relatively high, but rising inflation may force companies to raise wages in order to retain talent.

The risk for the economy as a whole is that companies raise wages and pass the cost on to consumers. A circular pattern like this could lead to an inflation spiral that drives interest rates higher, harming growth and equity valuations.

Markets currently expect the average hourly earnings figure to remain at 5.2 percent year on year (YoY), but traders should be wary of any further wage increases.

Source: Refinitiv

Dollar index technical analysis

This week, the dollar index reached a 19-year high, with price rising on the back of a significant break through the key $103.80 resistance level established in 2017 and 2020.

The dollar has weakened slightly today, but it is worth noting that any period of weakness appears to be a retracement of the recent rally from 103.19. Only a break below that level would result in a more pessimistic outlook for the US dollar.

Source: ProRealTime

DJIA technical analysis

The Dow Jones Industrial Average (DJIA) managed to hold on to 29568 support (its peak in February 2020), with the index attempting to gain ground in the three weeks since.

However, we are still in a bearish trend until the price breaks through the 33460 level. As a result, while we may see some near-term upside, the risk of another downturn remains for the time being.

Source: ProRealTime

 

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