ADP reported private sector employment increased by 330,00 jobs in July, well below estimates of roughly 700,000. The consensus estimate for Friday’s report is 900,000 new jobs. These expectations fall in line with recent comments from the Federal Reserve that the labor market still has ground to make up in the recovery from the Covid-19 losses.
Reaching full employment levels will be key for any tapering decisions from the Fed and will be monitored very closely by all involved. The participation rate is hovering around 61.6%, well below pre-pandemic levels. A difference of a few percentage points equates to millions of individuals looking for work. While the unemployment rate may be trending lower, there are still millions without work. Some of the drop in participation is attributed to those no longer looking for work due to early retirement because of the pandemic. These individuals will cause a permanent drop in the participation rate as the workforce shrinks, but not nearly enough to account for a 2-3% drop in the participation rate. For the employment levels to hit the figures the Federal Reserve wants, many of these employees no longer looking for work will need to change their minds.
Year-over-year hourly earnings continue to trend higher as one would expect with overall inflation in the economy. However, as economists have shown over the past several years, prices may continue to out wages in their growth. The current inflation conditions are not outside the scope of expectations from the Federal Reserve and actually help to bolster their case for rate hikes starting in 2023, assuming inflation continues at these levels and does not dramatically increase.
Should inflation increase further, measures may be taken ahead of schedule to control the money supply and attempt to slow inflation from becoming too much. This is a major concern of the market and may be referred to as a ‘Taper Tantrum’. Essentially, the market would become upset if the easy money conditions with low-interest rates change quickly or unexpectedly. This would change bank requirements and lending practices and lead to a re-valuing of assets, which in turn likely causes a market sell-off. The Federal Reserve will try to avoid this scenario as best it can, using various language in their minutes and meetings to signal they are aware of conditions and working to help markets. The current bull market can handle increased inflation and changing circumstances, but only when they are anticipated and planned. Markets do not like surprises.
Based on the ADP number being well under expectations, a surprisingly low employment number may be in the cards Friday. This would have implications with the market and may lead to volatile conditions in either direction. Its vital traders approach these economic releases with a plan in place if trading volatile markets.
News events such as jobs reports and announcements by the Federal Reserve can stir volatility in markets and traders should prepare accordingly to protect risk capital. For up-to-date information regarding futures contract expirations, news announcements & more, visit the NinjaTrader Trade Desk Calendar.