First Look at Jobs

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With the market volatility and the Fed FOMC meeting looming, the question or perhaps threat of a rate hike is a dark shadow over the equity markets. The Jackson Hole Summit, without Yellen, only offered more ambiguity. The last big factor prior to the FOMC meeting is the monthly employment report to be released this Friday. The perception of how it will impact the Fed hike decision is hyper sensitive and we could see huge market volatility (up or down) on Friday when the employment data is released.

First look at Jobs

The ADP (private sector payroll data) is the first look at jobs. It gives us a short-term forecast of what we should expect for the big government monthly employment data, released this Friday.

ADP released their data this morning, which showed the US created only 190,000 jobs in August vs a 201,000 expectation. Not a great sign for economic growth and the second blow came when ADP downwardly revised their July number to 177,000 from 185,000.

While the data reflects a slowing trend in job creation from the 200,000+ baseline most economists hope to see, it does raise the perception the Fed will NOT hike rates.

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        ADP National Employment Report: Private Sector Employment Increased by 190,000 Jobs in August<br /><br /><br />

Labor Report Expectations

Current Labor Report expectations is for 220,000 jobs (note the government data includes both public and private job creation, while ADP is only private). This morning a couple of economists have lowered their Friday Labor Report expectations.

Mark Zandi, of Moody’s, stated this morning on CNBC that while the ADP numbers were solid, even though they were below the expectations. His real concern was the Labor Report, which could come in weaker than expected. “”It’s very possible, I’d say even likely, that if the ADP number is reality, that we’re going to get a BLS number that’s closer to 160, 155 (thousand).”

Courtesy of Moody’s

If Zandi’s prediction is correct it could drive perception the Fed will NOT raise rates. However, it will also bring forth heavy volatility on Friday. The market will read mix messages, on one hand the economy is weaker than expected (based on job creation) which means SELL. On the other hand the economy is weaker than expected, which means the Fed will NOT hike rates, which means BUY.

That mixed message will drive volatility; we could see some whip-saw action and choppy market.

Market Reaction?

So what are the expectations of the Fed and Market Reactions? Remember Friday’s number will not play TOO much into Fed monetary policy decision (as to whether they raise rates), since it is only ONE data point. Yet it is the PRECEPTION that will drive market reaction and expectation. I would even concede it could certainly be used for justifying rate decisions.

Labor Report expectation is 220,000 jobs. ADP came in at 190,000 for August and revised lower July to 177,000. Here is my simple chart of what I think will be both market reaction and rate hike expectation

>275,000 jobs = rate hike expectation and market sell-off

190,000 to 240,000 jobs = uncertainty in rate hike and volatile market

<150,000 jobs = NO rate hike expectation and market rallies

There is some serious slop in there, mainly because there will be some argument over the “seasonal adjustments” that Zandi correctly brought up. However at the extremes, it washes out the argument and drives perception strongly in one direction or another.

FOMC Impact

Why is THIS Labor Report so important? Because it precedes a FOMC meeting in which 7 years of easy monetary policy and zero rates COULD be over. It can set a trend for market investing and expectations for months, if not years to come, if the general consensus believes we are now in a Fed “tightening” era of higher rates and reduction of money supply. So any data point, like the upcoming Labor will be hyper evaluated and the market will be hyper sensitive as it drives perceptions.

The only certainty is that the market is not going to stay in some pre-defined range. This market has broken supports, seen huge swings, and has not had the time and volume to consolidate at any level. So don’t expect the volatility to end and on Friday it could be huge (at least intraday), when the Labor Report is released.

Support & Resistance

INDU 16,000
Are we forming a double bottom with a higher low? The pre-market futures are pointing to a stronger opening. Resistance will certainly come into play at 16,500 area and support buying down in the sub 16,000 area. Again, this is just market volatility at this point heading into the perception of potential change in long-term Fed monetary policy.

NDX 4000 – 4300
The tech heavy index remains in the wild ride area, with radical changes in liquidity. Those changes in liquidity further drive volatility, which can see this index rocket higher or crash fast. Watching bids or offers step away in volume creates vacuums and this index can move. The futures, cash, and ETF indices trade big volumes and sometimes you have to wonder does the index drive the stocks or do the stocks drive the index. In these volatile times, you sometimes have to look at the index products to gain insight into market volatility, rather than the components.

SPX 1900
Much like the Dow Jones, this index could be trying to find a double bottom and a higher low. If we do put in some volume and support in here, we could get a solid bounce. Look for resistance in the 1980 range. I would look at supports in the sub-1900 level.

RUT 1120
Want to know general market order flow, this is the index to watch. It has been in a negative trend long before the S&P 500 and Dow Jones sold off, a great indicator. The recent bounce was not nearly as strong as the Dow Jones or S&P 500. Overall the Russell index looks weak and that is the one concerning factor as to whether this market is REALLY ready to rally back. 1160 is where resistance will start kicking in. Watch this index this week as a lead indicator of order flow and liquidity in the market.

Low Expectations

This week will be all talk about Jobs heading into the Labor Report. The Labor Report is only one data point, but a big one. On Friday it will be the single factor that will drive volatility and perception of any rate hike. The reality is – the Fed has already made up their mind – regardless of the Labor Report.

I personally expect a 150,000 number – because that will give the best window dressing and justification for the Fed NOT to hike rates. They certainly do NOT want to point to equity markets as to WHY they didn’t hike rates, because the market is NOT supposed to be a data point in which they make decision. The market is certainly not part of their Dual Mandate. A weak employment report, which IS part of their dual mandate gives them far more justification.

There is a growing camp of a “one and done” modest rate hike. Which I believe is a possibility, if it is just to get the media and market off their back. However, with the current market volatility and economic data – I am not sure if they are willing to take that risk just yet.

3 Responses to “First Look at Jobs”

  1. McRocket says:

    Interesting conclusions – which I generally agree with.

    Personally, I think the Fed seems almost desperate to do a ‘one and done’.
    But I agree that the numbers are just too weak to do that right now. If the BLS’s numbers are only fair – and with the markets generally falling lately – I think the Fed would look foolish to raise rates now. How can they claim to be data dependent AND then raise rates when much of the data is fair at best?

    To me, the question is, why are they lately so seemingly desperate to raise rates? Why now when they barely seemed to care for years?

  2. DocTim says:

    To McRocket=> because 1) they want to believe that their past policies are working and 2) they need ammo for any potential looming economic crisis, and raising rates potentially helps them accomplish both. IMO

    • McRocket says:

      I agree with the first one. And I used to agree with the second one until almost all of the rhetoric coming from the Fed these days is that any rate hike will probably be of the ‘one and done’ variety. So why even bother?
      To test the markets?
      They sure are causing a ton of turmoil for a tiny rate increase that I doubt will help them much during the next recession.