US jobs report preview: could an NFP surge boost stocks?​​​​​

The July jobs report out of the US provides us with another opportunity to take a deep dive into the economic recovery that is underway after a huge slump two months ago. Unlike the usual Friday release, the US closures for Independence Day means that the event gets shifted to Thursday 2 July.

June NFP hopes to build on recovery trend

Last month saw a surprise outperformance in the headline jobs number, with non-farm payrolls (NFPs) surging back into a positive reading of 2.5 million, following the whopping -20 million figure the month prior. This time around we are looking for improvement on that, with markets expecting something close to three million newly employed workers for the month of June.

Given the shift in the report date, the latest jobless claims figure will also be released at the same time, with initial claims expected to continue their downward trajectory. However, unless we see a sharp rise in this figure, the more notable release to keep an eye out for will be the continuing claims, which finally broke below the 20 million threshold last week. Markets are looking for a figure around 19 million, after the 19.5 million seen a week ago.

Elsewhere, a decline in unemployment (12.3% expected from 13.3%), and year-on-year (YoY) average hourly earnings (5.3% expected from 6.7%) should be seen as a positive if we do still see that trend continue. While a decline in average hourly earnings would ordinarily be seen as a negative, the recent spike highlights how lower paid employees have disproportionately been hit through this crisis.

Therefore, a decline in average earnings would signal a return to work for jobs in low wage sectors such as services.

Speed of recovery is key to the market outlook

Perhaps equally as important as the figures themselves will be the question of whether markets are actually in a position to care about what this forthcoming jobs report tells us. With US coronavirus cases leading a number of states towards a potential second bout of economic tightening measures, some will fear that the recovery picture is undermined by weakness from such actions.

However, with lockdowns likely to be localised, rather than the nationwide restrictions previously put into place, the detrimental impact on the economic picture may be lessened. For now, markets are likely to treat these data releases with a degree of intrigue.

Unlike the huge crash in employment around March and April, the speed of the recovery is going to be key in determining what the economic path looks like going forward. Of course the caveat is that there are hurdles ahead to overcome. However, if the rebound lacks bite, then there will be fears that this could be a long drawn out saga for investors. Conversely, a sharp rebound could provide greater risk-on sentiment as investors feel emboldened around the potential recovery ahead of us.

S&P 500 technical analysis

Looking at the S&P 500, we have seen a clear downtrend in play over recent weeks. The rebound we have seen this week points towards a potential bullish breakout. However, that would only come with a break through the 3092 resistance level.

Given the recent positive relationship between stock market sentiment and the data, a jobs report outperformance could potentially provide the kind of boost that could see the 3092 level broken. Until that happens, another turn lower remains a distinct possibility to continue the current downtrend.