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Nonfarm Payrolls Data Preview: The U.S. economy restarts and NFPs may see a positive surprise
Lucia Han
2021-04-02 25

Abstract: The market is more optimistic about March’s non-farm payrolls (NFPs) as vaccination and economic recovery accelerate. The Fed appears to have focused far more on the recovery of the labor market than on economic recovery and the maintenance of order in financial markets, downplaying the current turmoil in stock and bond markets caused by the surge in U.S. bond yields. And improvements in the labor market are likely to continue to drive the yields higher although institutions are predicting a potential windfall from the non-farm payrolls data; meanwhile, inflation risks are being priced in advance. Therefore, the non-farm payrolls may be more than a pleasant surprise.

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Abstract: The market is more optimistic about March’s non-farm payrolls (NFPs) as vaccination and economic recovery accelerate. The Fed appears to have focused far more on the recovery of the labor market than on economic recovery and the maintenance of order in financial markets, downplaying the current turmoil in stock and bond markets caused by the surge in U.S. bond yields. And improvements in the labor market are likely to continue to drive the yields higher although institutions are predicting a potential windfall from the non-farm payrolls data; meanwhile, inflation risks are being priced in advance. Therefore, the non-farm payrolls may be more than a pleasant surprise.

Review of February NFPs data

February's NFPs data beat expectations by a wide margin. U.S. employers added 379,000 jobs last month, well above market expectations of 200,000, pushing the unemployment rate for February down by a fraction of a percentage point to 6.2%. The improvement in employment was led by a big increase in jobs of leisure and hospitality industries, reaffirming the positive impact of accelerated vaccination and economic recovery on the service sector, as shown below:

 

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Source from: U.S. Department of Labor


Also, the February NFPs report was seen as setting a very optimistic tone for the labor market recovery, thanks to widespread vaccination and the government's policy of relaxing COVID-19 restrictions on businesses. As for March NFPs, economists generally expect an increase of 630,000 jobs, the highest level since October, and a drop in the unemployment rate to 6.0%, the lowest level in more than a year.

American consumption rebounded strongly, but the number of new infections climbed

In March, the Senate passed the latest version of the $1.9 trillion stimulus bill, including $1,400 in cash handouts that were supposed to boost American spending, and aid to small and medium-sized businesses that would help firms increase hiring, further boosting employment. In addition, faster vaccination and the easing of economic blockades in several states have increased the number of people eating out, traveling and doing other entertainment activities. But while these positive factors have supported the labor market recovery, they have also had negative effects. Many economists say fewer commercial restrictions, ample household savings and more government money pouring into the market have only exacerbated the surge in new COVID-19 cases. This is supported by the recent rise in the number of new infections. And the rise may add a bit of uncertainty to the labor market recovery, despite the expected significant improvement in March NFPs.


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Initial claims for U.S. jobless benefits fall below 700,000

New claims for jobless benefits fell in March to their lowest level since the pandemic erupted, as employment and consumer spending boosted the U.S. economic recovery, which seems to set a positive tone for the NFPs report, as shown below:


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Source from: U.S. Department of Labor


As the chart shows, U.S. initial claims for jobless benefits declined gradually in March, even below 700,000 for the first time in the week ending March 20. It's worth noting, though, that while the number has dropped significantly from its high, it's still well above the roughly 200,000 numbers seen in 2019.

How will financial market react to the NFP report of March?

1. The U.S. Dollar Index rebounded sharply, supported by higher Treasury yields. The yield on the 10-year Treasury note recently spiked above 1.77%, its highest level since last January, as expectations of higher inflation and economic recovery grew and Biden's over $2 trillion infrastructure plan unveiled. As a result, the dollar rallied, briefly breaching 93.5, its highest level in more than four months. The short-term upward trend was boosted by the U.S. economic recovery and the continued rise in U.S. bond yields, but the long-term negative impact of the large-scale quantitative easing implemented by the U.S. government and the Fed on the dollar should not be underestimated. If the NFPs data is better than expected, concerns about the Fed’s rate hike may return and the dollar may continue to rise.


2. The gold market is likely to be more volatile. Gold prices continued to fall, recently to near the resistance level of 1680, as rising Treasury yields and improving economic recovery prospects weighed on risk aversion. Even though the current gold has rebounded slightly above the 1700 level, if this NFP report brings surprises, then gold market may fall into turmoil again.


3. Oil demand fears return and price volatility increases. Crude oil prices briefly rose last week when the giant container ship ran aground in Egypt's Suez Canal, but the rally stalled as a third wave of the virus in Europe came and OPEC+ lowered its 2021 oil demand growth forecast. Earlier, oil prices had been pushed higher by better-than-expected NFPs data for February, which boosted risk-on sentiment. Thus, they could find new support if the NFPs data for March improves significantly; Otherwise, the disappointing data and the lowered forecast may keep oil prices on the downside.


Taken together, the employment is expected to improve in the coming months as more people are vaccinated and worries about the virus are increasingly allayed. But millions of people are still out of work, meaning the labor market recovery still has a long way to go. However, the U.S. economy is in a turning stage, where financial asset prices are more sensitive to the recovery of the labor market. therefore, investors should be prepared in advance for the upcoming opportunities.


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