Markets Wait for a Twitch Either Way in Jobs Data

The difference between a market rally and a rout on Friday could come down to a few hundredths of 1 percent.

On Friday, Wall Street will be closely watching the employment figures for June, which the Labor Department is set to report before the opening bell.

Analysts expect the economy to have added 165,000 jobs in June. But a swing of just 50,000 jobs — a few hundredths of a percent in a job market of more than 135 million people — could have broad implications.

If the economy created significantly more positions, the strong numbers would increase the odds that the Federal Reserve will begin in the coming months to taper its $85 billion in monthly bond purchases aimed at stimulating the economy. That would be a negative for stocks, which have benefited from the flood of money into the financial system.

A weak jobs figure would call into question just how vigorous the economy is and whether it is too early for the Fed to start stepping back. In the hall of mirrors that is Wall Street, investors would see that as a positive for stocks, since it might extend the central bank’s stimulus efforts.

Further complicating the market calculus, volatility will most likely be heightened on Friday. Many traders are off for the long weekend after the Independence Day holiday, so trading volumes could be thin.

“Any number between 150,000 and 175,000 is a nonevent,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “Anything over 200,000 would get people really concerned about a Fed exit, while a really weak number would force everyone to rethink if the economic recovery is going well. So no news is good news.”

The possibility of a change in Fed policy has caused recent swings in financial markets. Yields on 10-year government bonds have risen sharply, lifting mortgage rates, while stocks have sold off slightly.

On Wednesday, shares edged higher in an abbreviated trading session ahead of the holiday. The Standard Poor’s 500-stock index has risen more than 13 percent this year.

Friday’s figures could provide a clue as to whether the stock market rally continues in the second half of 2013. But even veteran economists admit the intensity of the focus on a sliver of one month’s worth of data is a bit much.

“There is double the normal focus on a number, which already gets too much of a reaction,” Mr. Harris said. “And payroll surprises of 100,000 happen every year.”

What is more, there is added uncertainty since seasonal factors make June numbers particularly hard to predict. High school and college graduates enter the work force, for example, while teachers in some cases exit for the summer. Uncertainty in the jobs survey is greatest at the beginning of the summer, the end of the summer and the New Year, Mr. Harris noted.

And this time, economists are struggling to gauge the impact of the recent budget cuts in Washington in certain sectors, like military contractors. So far, sequestration, as the process of mandatory spending cuts is known, has not had a sizable effect on the labor market, at least according to government data.

Last month, the chairman of the Fed, Ben S. Bernanke, said the central bank could begin easing back stimulus efforts later this year if the job market continued to show signs of strength, with the $85 billion monthly bond-buying program wrapping up when unemployment sinks to 7 percent. The Fed currently expects that to happen by the middle of 2014. The June unemployment rate, which is based on a separate survey from the one that calculates the change in overall payrolls, is expected to fall by 0.1 percentage point, to 7.5 percent from 7.6 percent.

“They’re always significant but Bernanke’s tying it to the 7 percent rate does ramp up the employment figures’ importance,” said Dean Maki, chief United States economist at Barclays. Mr. Maki is estimating that the economy added 150,000 jobs, slightly below consensus, but not enough to alter the Fed’s plan to begin tapering later this year, possibly as early as September.

Job creation has been slowing, however, he said. The average number of jobs created each month over the last three months — a better indicator than one month alone — totaled 155,000. That compares with a three-month average of 233,000 for December, January and February.

If the economy were to reverse course and add 250,000 jobs, and the rate fell more sharply in June, Mr. Maki said, the tapering could begin as early as late July, when Fed policy makers next meet. “We’re not in that camp,” Mr. Maki said. More likely, he said, the scaling back will be announced after the Fed meeting in mid-September, when Mr. Bernanke will hold a news conference as well, unlike the July meeting.

On Wednesday, Automatic Data Processing, which tracks private payrolls, reported an increase of 188,000 jobs in June, a bit above the 160,000 consensus and significantly stronger than in May, when A.D.P. reported a jump of 134,000 jobs. A.D.P.’s data often varies from the government figures, however, adding to the confusion on Wall Street. New claims for unemployment fell slightly last week to 343,000, the Labor Department also reported Wednesday, in line with the trend of the last four weeks.

The robust A.D.P. number prompted Ian Shepherdson, chief macroeconomist at Pantheon Macroeconomics, to lift his estimate for Friday to 175,000 jobs. But he, too, admits the Wall Street guessing game is hardly scientific. “You can have a Platonically perfect model and still get the number wrong.”

Article source: http://www.nytimes.com/2013/07/04/business/markets-wait-for-a-twitch-either-way-in-jobs-data.html?partner=rss&emc=rss