NFP preview: Winning streak in the labor market could continue in August

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Overdue correction, especially in the US tech sector finally happened on Thursday, however there are some solid signs of cooling-off on Friday. European equities indicate renewed buying interest, albeit more cautious, while futures on the US stock indices advanced a bit. In the light of increased market fragility and heightened concerns about prolonged decline, US eco data could be a reliable lifeline for market sentiment, and the US Labor Department should come to the rescue today with its monthly Non-Farm Payrolls report.

Labor market data for August will undoubtedly be more important than reports from previous months. First, the fragility of the market has grown after yesterday’s detente. Secondly, over time, the influence of the pandemic shock has faded away, government stimulus run out of steam, and potential of self-sustained pickup came to the fore, which can be best reflected by the hard data. Fed chief Powell said earlier that economic clarity will appear a little later, when the dust settles. This also justifies closer focus to the labor market data in August.

Here are some consensus figures about the US labor market:

– Job growth: +1.4 million. Forecast range from -100K to +2.38 million, growth in the previous month +1.76 million.
– Job growth in the public sector – + 301K.
– Unemployment U3 is expected to fall to 9.8%, compared to July print at +10.2%. An important role is now played by the involvement of the working population in the labor force, i.e. labor force participation rate. With the pandemic, this figure dropped to 61.4%. Recent rhetoric from the Fed pointed to rising importance of LFPR in the relation between unemployment and inflation.

Goldman indicated that high-frequency labor market data suggests that job growth continued in August:

All six sources point to job growth, but estimates vary. While Google Mobility and ADP indicate modest growth, rapid declines in jobless claims and the Dallas Fed survey suggests that growth could have been significant.

As for unemployment benefits, if in July the average weekly growth of initial applications was 1.4 million, then in August it dropped to 1.2 million. Continuing claims declined faster as well.

Employment sub-indices in PMI manufacturing / non-manufacturing sector showed an improvement in August compared to July (+3.0 points in manufacturing, +2.6 points in non-manufacturing). In addition, the dynamics of layoffs from Challenger indicated that layoffs dropped 65% MoM in August to 116K.

Based on all the considered indicators, it’s possible that August print will be a moderate positive surprise supporting revival of risk-on in equities.

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