US non-farm payrolls preview: the calm before the storm

Given the spike in US initial jobless claims last week, we might expect the upcoming non-farm payroll (NFP) report to reflect the growing coronavirus crisis. But it will not be this month’s report that lays bare the extent of the crisis, since the jobs report uses answers submitted from the first two weeks of March, just before the full extent of the crisis became clear.

US economy faces great uncertainty

As a result, the report this month could show anything from a loss of 600,000 to a gain of 100,000, an immensely wide range that underlines the degree of uncertainty facing the world’s most important economy.

We can expect a rise in the unemployment rate, but even here it will only be small, and likely to be outdone in coming months. The current rate of 3.5% is expected to rise, perhaps to 3.8% or 4%, but this is nothing compared with future expectations, which forecast a possible 9%-10% rate just to begin with.

As a clue, we can look at the weekly initial jobless claims. Just two weeks ago these were at multi-decade lows, but last week’s figure skyrocketed to 3.28 million, and this week’s could hit 5 million. A number this high has not been seen before, even in the depths of the financial crisis and Great Recession of 2007-2008.

Also of note from this week onward will be continuing claims figures. These are a week behind the initial claims, and are expected to surge to nearly 5 million this week. While NFPs lag by a month, these weekly figures will be much more up to date, and thus reassume the importance they had during 2007 and 2008. While we can expect the series to be noisy, in that it will provide plenty of sharp rises and drops, they will give us a direct sense of how fiscal and monetary stimulus is feeding through to the broader economy.

NFPs a volatility trigger in uncertain times

NFPs, of course, also recover some of their importance that they have lost as the recovery of 2009 onwards morphed into a broader economic expansion. Once again, we can expect the number, and its associated unemployment rate, wage data and monthly revisions to provide the kind of volatility that grizzled veterans of 2008 and later will remember.

It follows that a big rise in claims and then, in due course, a substantial drop in NFPs, could be negative for risk assets and bolster the US dollar. But it depends on the size of the surprises – as we saw last week, investors seem to have already realised that the next few months will be tough and that data will be dire. Thus the scale of the downside may be limited, although if the market expects much deeper economic damage from longer shutdowns then the risk-off moves could be bigger.

But we must also be open to the possibility that the stock market will bottom before unemployment does. Just as equity prices tend to rally before earnings move into an upward path, we can expect indices to begin to move higher even as jobs data remains poor. That moment may not have arrived yet, since a comparison to previous recessions and shocks does not suggest an immediate rebound is on the cards. But just as in 2009 and 2010 many investors missed out on the initial gains, the actual recovery in equities, when it arrives, will seem to be built on still-poor fundamentals. The stock market is not the economy, and it should begin to recover before a full rebound in economic data becomes apparent.