After a surprise from the non-farm payroll data published last week, when the print came in at 266,000 new jobs added whilst the consensus expected 978,000 new jobs, market participants are keeping a close eye on U.S. retail sales data published on this coming Friday. Although non-farm payroll data has historically allowed us to gauge the health of the U.S. labor market and the economy, this month’s number should be interpreted with a pinch of salt.
Non-farm payroll has historically been considered as a leading indicator, representing the number of new jobs added in all non-agricultural businesses. A surprise to the upside or downside would generally cause a significant market volatility in equity but also in credit and FX markets. The effect has weakened in recent years with markets interpreting bad news as good news as the central banks and governments have continued to provide liquidity and support to the markets since the Great Financial Crisis in 2008. After a shock print in April last year when 20 million jobs were cut, markets have seemingly become numb to weak data prints. Although only 14 million jobs have been added since, leaving an estimated gap of 6-8 million unemployed or underemployed workers in the U.S., equity markets have been marching higher, reaching all-time highs week after week.
We witnessed the same last Friday – despite a disappointing print of 266k new jobs (versus the expectation of 978k) and a downward revision of previous month’s data, S&P 500 closed at all-time high of 4232.61. This weak print can be interpreted in a number of ways – potentially the consensus got a bit ahead of itself, extrapolating the strong numbers in Q1 this year. Also, given the ample support from the federal government in the U.S., individuals may be unmotivated to return to the workplace, especially in lower paid roles. A fear of catching coronavirus may also play into the thesis. Lastly, we may witness a structural change in the labor market as there is less demand for people in certain sectors, with corporations increasing productivity through automation. Business capex has been on the rise with an increase of 16.7% in Q1 this year. Moreover, corporate expenditure on technology as a share of GDP has expanded by 6% – the highest it has ever been.
All eyes are now on the retail sales data published this coming Friday. After a popping March print of 9.7% expansion, we can expect a significantly weaker number this week. Retail sales have clearly been supported by direct stimulus cheques sent to individuals, as the jump in data coincides with months when cheques were sent out. Now that direct payments to individuals are nearly all paid out, we can anticipate retail sales to roll off as well. The momentum might carry over to Q2 but it is unlikely that it will provide the same level of support we saw in the previous quarter when consumer spending grew by 10.7% on an annual rate. Disappointing retail sales might put pressure on U.S. companies in consumer staples and consumer discretionary sectors but weakening sentiment could potentially hurt risk assets as a whole.
S&P 500 closed at all-time high, gaining 1.23% to 4232.61. Nasdaq-100 shed 1.02% to 13719.63 points as the fear of higher interest rates reverberated across markets. Russell 2000, representing U.S. small and medium companies, was largely flat gaining 0.23%. The dollar index DXY lost -1.17%, near 90.23 and not far from swing lows of 89.9. Gold and oil futures rose respectively 3.35% and 2.17%, supported by the weaker U.S dollar.
Have a great trading week ahead!