Market Focus is on Tomorrow's Jobs Report

The Bureau of Labor Statistics will release the June 2016 Employment Situation report (popularly called the "Jobs Report") at 8:30 AM EDT tomorrow.  It's one of the most closely watched releases each month, and its trends have a significant impact on the Fed's monetary policy.  As you may recall, the May report issued last month stunned the financial world, showing a dismal increase of just 38,000 jobs in the Non-farm Payroll category.  When teamed with Brexit, the Italian banking crisis, and increased fears of recession in Europe - all factors Fed Chair Janet Yellen termed "headwinds" - the May report pushed any prospects of another Fed rates hike out into the distant future.  The futures market is currently projecting a near 0% chance of a rate hike in September, although it starts to climb ever-so-slightly in the fourth quarter.

Analysts do not expect such a dismal jobs report tomorrow, although the projections of 175,000 on the optimistic side to as low as 140,000 on the pessimistic side are still well under the levels needed to sustain economic growth.  The street is also expecting a slight rise in unemployment from 4.7% to 4.8%, and the expectation for hourly average earnings is an increase of 0.2%.

The June report, however, is being closely watched more as a harbinger of the economic outlook for the next twelve months.  Some analysts are now placing the risk of recession at 30% for the next year.  Given the turmoil in Europe and the impact that contagion can have in the States, I would categorize that 30% as very optimistic.  Even Janet Yellen, in the cryptic fashion typical of a Fed Chair, expressed concern last month: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015?”  If, indeed, we see another month of anemic growth, prospects for recession will spike dramatically.

There's one important factor that will not manifest in this report, and that is the effect of Brexit on the US jobs market.  The data for the Employment Situations report closed on June 12, well before the UK vote to leave the European Union.  That vote sent shock waves through the world markets, including here in the States, and most companies are adjusting their capital plans to account for it.  Financial firms in particular are adjusting to the reality of prolonged low interest rates heading into 2017, and most companies with heavy European exposure are still trying to assess what the vote means for them and what adjustments they'll need to make in their 2017 capital plans.  Whenever there's uncertainty of that nature, companies become reluctant to add to their workforce.  None of this, however, will be reflected in this month's release.

The final data points that will be most interesting concern the Labor Force Participation Rate.  You've seen me write time and again that, in my view, this is the most accurate measure of the true employment picture, and the numbers released on June 3 were horrendous.  The rate dropped to 62.6%, setting an all-time record of 94,708,000 Americans out of work.  Analysts are expecting the rate to drop even lower in tomorrow's release.

What the report will mean for trading tomorrow is anybody's guess.  I've long since stopped trying to predict how the market will react to pre-open releases, especially when you have to factor in the contradictory effects of bad news being good for interest rate projections, but bad for future growth projections.  I've learned over the years to sit back on release days and let the market sort itself out over the first 30-60 minutes of trading.  Tomorrow will be no exception.