A month ago, investors let out a collective gasp when the government revealed that only 88,000 jobs had been created in March. But contrary to conventional wisdom, this awful and unexpected update on the most important aspect of our economy did not tank the markets, it sparked a rally.
Today, with stocks about 2.5% higher than they were in early April and trading at record highs, we find ourselves on the cusp of another critical payroll report. Only this time, expectations are low and falling as investors brace for disappointment.
"You still have a lot of stuff pushing down on hiring," says John Canally, economic strategist at LPL Financial, in the attached video. "Because companies can't grow revenues, the only way they can control costs is to not do a lot of hiring."
As of now, consensus for Friday's report from the Department of Labor stands at 155,000 total jobs and no change in the 7.6% unemployment rate. While today's weaker than expected ADP/Moody's report will surely lead to some downward revisions over the next two days, Canally doesn't think we'll see anything nearly as a bad as what we saw in March.
''I think in the past, people would have marked down their numbers for the jobs report a little further," he says, adding his belief that over the past year or so the recently revised ADP report "has lost a little street cred.''
As he sees it, the April jobs data will likely be "a more status quo, 150,000 type report" that won't be weak enough to get the Fed's attention and prompt any action on scaling back quantitative easing.
Even so, the culprit behind the cool-down is clearly of our own making, and Canally says that while the sequestration impacts might take a small bite out of hiring, the real hit "will be seen in the hours worked, which flows into incomes, which of course flows into consumer spending."
That is certainly not a good trend, but it is one that he believes will stabilize and correct itself in the months to come. What is harder to gauge, however, is how investors will react during the transition given the fact that stocks are at record highs and 10-year Treasury yields are approaching record lows.