US: Jobs should rebound, expect a reaction if that’s incorrect - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the US dollar remains stronger since the Brexit vote result two weeks ago with the DXY index up 2.7% as I write, primarily due to the declines in EUR/USD (-2.6%) and in GBP/USD (-13%).

Key Quotes

“The extent of the declines has been offset by the weakness of the dollar versus the yen (-5.5%). Given the escalated concerns over the fallout from the Brexit vote in the UK, the jobs report today has perhaps added importance as bad news on the US economy today could be enough to trigger a more pronounced flight to quality as investors give greater credence to the prospect of a more serious downturn for the global economy.

What was clear this week is that the FOMC has become more concerned over the outlook for the economy given the deceleration in the pace of jobs growth in recent months. The May NFP reading of 38k was the third consecutive month of slower jobs growth and the smallest gain since payrolls turned positive in October 2010. The Labor Market Conditions Index (released on Monday) has tanked from +1.8 at the end of last year to -4.8 in May, the weakest since May 2009.

Our own model estimate for NFP does point to a rebound with our NFP model predicting 185k in June, up from 140k last month, which of course was an over-estimate of the actual print of 38k but our 140k estimate for last month was still the weakest since November 2012.

The actual print last month was weaker also due to the Verizon strike which subtracted 37k from the total and that figure will be an addition to today’s reading – so based on the Bloomberg consensus for today (180k), the ex-Verizon NFP is 143k after last month’s 75k. These gains remain below the 6-month and 12-month averages of 170k and 200k respectively and hence even with a rebound, the markets will perhaps maintain concerns over a slowing US economy. Certainly a weaker than expected figure will only reinforce the current risk aversion in the markets and perhaps trigger renewed flight to quality and bigger market moves.”