Non-Farm Payroll Week
Friday is Non-Farm Payroll day and the market consensus shows an increase in March payrolls of 655K.
I'm expected more service job gains on stronger US reopening, especially in leisure, to result in nearly 700k job gains. Leisure and hospitality are around a third of the missing jobs, and there’s much runway left in the recovery. The drag in construction from bad weather should disappear, and housing starts should rebound and provide a bounce to construction jobs.
Temporary layoffs are an abnormally high share of total unemployed. These have a re-employment rate which is more than twice as high as for the rest of the unemployed workers. This feature of the labour market should bring energy to the labour market in the short term as mobility restrictions get lifted. Economists estimate "that between 1.0 and 1.5 million workers on temporary layoff could transition back to employment in the near term."
Employment Forecast Summary
There’s been a noticeable pick-up and growth in March. As such, "The Street" is likely positioning for an upbeat cadence in economic news over the coming weeks, and an above consensus is quite possible.
Also, service spending is picking up as those stimulus checks hit the real world (dining, lodging, and air travel). The stimulus effect coinciding with increased vaccination and the arrival of warmer weather could be a game-changing panacea for risk. In conjunction with a recovery in industrial activities from the Texas storm, this puts March well into a positive growth inflexion category, an unquestionably bullish signal for risk assets.
US yields have been ticking higher, supporting the US dollar. Indeed, this shift is possible in anticipation of rebounding tier one US economic data, like this week's Non-Farm Payroll data. With March US economic prints well in the positive growth inflexion category, it's setting the table for a Spring liftoff. The stimulus effect is finding its way into the real world, coinciding with increased vaccinations. The arrival of warmer weather could be a game-changing panacea for US jobs and economic growth. The initial reaction function could see a stronger US dollar via the higher US yields channel on payrolls.
USDJPY is up big, breaking out of the recent 108.34-109.37 range as US yields climbed and positive risk sentiment fueling the move, even when the rest of the USD complex is small down. We’re right on top of the next resistance level at the June high of 109.85, so there could be a further breakout higher on USDJPY on an upbeat NFP.
But there could be downside implication for stocks as a bounce higher in US yields could have negative consequences for long-duration tech stocks. So, during NFP week, the NASDAQ is not my preferred way to play a solid reopening hand through the more robust US employment channel. Franky, you need to be careful in this space with the US and China battling it out for internet technology supremacy amid China stock delisting rumours.
Higher real yields will strengthen the dollar. The combination supports equity prices, although tech faces some challenges.
Risk to the Long US Dollar View
Pressure remains on the single currency (EUR) and there’s been a steady downtrend. It has come a relatively long way in a short period, and with risk sentiment finding a bit of a base, the likelihood of a short-term correction is rising.
Here are some changing market views to consider, with currency to express a long USD bias if you’re so inclined…
EURUSD - last summer's fiscal recovery plan was critical for politics. It moved the resting point for EURUSD to around 1.1700 from 1.1000. Though I'm dollar bullish, I'm not exceedingly bearish on the euro, and EURUSD could be reaching its lower limit. The European vaccine rollouts will improve and Europe should start to catch up. I'm not willing to buy EURUSD, but I don't want to keep selling.
USDJPY - The JPY has been my main focus all year since the Georgia State runoff and the Democrat win, which suggested massive stimulus and higher yields where I set in a target of 112. So far, I might have been luckier than right. The Bank of Japan published the review last Friday, and as USDJPY struggled to sustain a break above 109.00, many JPY traders in New York and London felt like it was time to call a change, but I think we’ll continue to ride this one out.
GBPUSD - The UK vaccine success is in the price and the pandemic has taken the headlines away from Brexit. But Brits can't fail to notice the "out of stock" attached to almost everything at the moment and the emails from retailers blaming Brexit problems. I feel the UK still has to mark reality. The UK view makes me switch to long EURGBP, a complete turnaround as I now look for opportunities to get long EURO after a convincing Green Shoots statement from last weeks Ifo.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower