Mid-week market update: The July Employment Report has the potential to be a game changer in how the market perceives the recovery. Estimates of job gains are all over the place, and the median stands at 1.5 million.
High frequency economic data has been weakening, and I am inclined to taken the “under” consensus on the print. This could be a big negative surprise for the market and spark a risk-off episode.
Soft high frequency data
There is a flood of high frequency data that suggests a soft Nonfarm Payroll (NFP) report. Much of the gains in employment in recent reports are attributable to the return from furlough of low-wage service workers. A new study and poll of over 6,400 US respondents shows that workers previously laid off and re-hired are being laid off again.
Using high frequency Census data, former Treasury official Ernie Tedeschi estimated the NFP print to be a loss of -2.2 to -4.7 million jobs, which would be a huge negative shock.
CARES Act 2.0
The market reaction
The market’s reaction to the current economic outlook has been mixed. The risk-on rally from the March lows is largely attributable to the expectations of a V-shaped recovery, not just in the US but globally. One useful cyclical indicator is the copper/gold ratio, which has closely tracked the 10-year Treasury yield. These two indicators have diverged recently. The copper/gold ratio rose, and then fell. The reversal can be partly explained by the strength in gold prices. At the same time, the 10-year Treasury yield fell to all-time lows, which is a risk-off signal. Which is right?
The decline in bond yields and rally in bond prices are technically significant. The 10-year yield broke a significant support while tracing out a head and shoulders formation, with a target of 0.23%. Similarly, the long bond ETF (TLT) staged an upside inverse head and shoulders breakout with an upside target of 188. Both breakouts are holding so far.
As I pointed out before, the SPX appears to be tracing an Elliot Wave diagonal triangle, which is an ending pattern. As well, the higher highs are not being confirmed from a momentum or breadth perspective.
The NASDAQ 100, which have been the market leadership, has staged an upside breakout through resistance.
We could see some real fireworks this Friday from both the NFP report and the soft deadline of CARES Act 2.0 negotiations.