The U.S. dollar traded higher against all of the major currencies on Thursday as months of U.S. political uncertainty finally settled. Last night, Joe Biden was certified as the winner of the 2020 election and in a statement President Donald Trump said there will be an orderly transition on Jan. 20. The control of Congress has been resolved with Democratic victories in Georgia. Currencies and equities cheered these developments with the Dow Jones Industrial Average climbing 211 points and the U.S. dollar rising across the board. Amidst all of yesterday’s wild developments in Washington, it's easy to forget that its nonfarm payrolls week. NFP is typically one of the most market-moving pieces of U.S. data, and economists are calling for the fewest job growth since April.
For the first time in eight months, the U.S. economy may be adding less than 100,000 jobs in the month of December. We haven’t seen numbers this bad since the harsh lockdowns in the spring. In fact, we wouldn’t be surprised if there were net job losses last month. Many states like California restored restrictions and, according to ADP (NASDAQ:ADP), private payrolls declined by 123,000, which was much worse than the 88,000 forecast. Taking a look at the arguments in favor of stronger and weaker payrolls, all signs point to a soft release. Aside from ADP, the employment component of services ISM dipped below 50, a sign that more companies are shedding rather than adding jobs. Jobless claims also spiked at the end of the year and, while the manufacturing sector continues to chug along, those numbers are separated from NFP.
The big question is whether investors will shrug off a soft release just like they have every piece of bad news we’ve had this year. The rallies in currencies and equities will probably continue as long as job growth is positive, but a negative read may be hard to ignore, especially at the onset. Vaccines are being rolled out, but it will be a long time before large swaths of the population are vaccinated. As a result, lockdown measures will remain in place and could toughen before they are eased. Negative job growth will erase today’s gains in USD/JPY and send EUR/USD to fresh multi-year highs. Anything in excess of 80,000 would be positive as long as there isn’t a major spike in the unemployment rate or slowdown in wage growth. Throughout last year and into this one, investors have looked past weak data, so while NFPs are important, most people have discounted a softer release.
Canadian labor market numbers are also on tap Friday. Job losses are also expected for the first time since April. The Canadian dollar held onto its gains today despite significantly weaker manufacturing data. The IVEY PMI index dropped to 46.7 from 52.7, which is the first time its been in contractionary mode since May. Canadian trade data was better than expected but the steep drop in IVEY signals weakness for the labor market. Job losses in Canada could trigger a short-term bottom for USD/CAD.
Outlook for Non-Farm Payrolls
Arguments in Favor of Stronger Payrolls
1. ISM Manufacturing Employment Index 51.5 vs. 48.4
2. University of Michigan Index at 80.7 vs. 76.9
3. Continuing Claims 5.2M vs. 5.5M
Arguments in Favor of Weaker Payrolls
1. ISM Services Employment Index 48.2 vs. 51.5
2. ADP reports -123K job losses vs. 88K forecast
3. Consumer Confidence Index at 88.6 from 92.9
4. Challenger Job Cuts at 77K vs. 65K prior
5. 4-Week Average Jobless Claims at 836K vs. 778K