Tomorrow is NFP day. And, given the changes in the labor market recently, it’s likely to get all of the attention.
But even with headlines and market volatility around that, we shouldn’t neglect the PMI data that comes out an hour and a half later.
It’s the last major event to close out the week, and we could see the market move quite a bit afterwards.
Everyone is going to be extra keen on the non-manufacturing PMI because it covers the services sector. That’s the sector that suffers most directly and immediately due to the measures to control the COVID-19 outbreak in the US.
Expectations Are Not What They Seem
The thing is, though, the survey happened before most of the latest and most dramatic news about the effects of the virus.
It concluded long before the number of US cases surpassed those of China. This was back when the mayor of New York was still calling for public events.
Consequently, we might not see as much of a drop in the reading.
Of course part of the job of a good executive is to prepare for the future. So, even before social distancing measures came into play, purchasing managers should have been planning.
That could well be reflected in the survey and pull the index down.
What We Are Looking For
Fifteen minutes before the ISM figures, we get a bit of a preview with the publication of the Markit Services PMI. These are the final numbers and we can expect them to affirm 39.1 reported in the preliminary release, the worst reading on record.
The key figure for the markets is ISM Non-Manufacturing PMI. Projections indicate that this will slip into contraction at 45.0, quite a bit lower than 55.6 prior.
This wouldn’t bring the reading down to record levels, however. Analysts anticipate that next month will show the full effect of the anti-pandemic measures.
The Jobs Market
The other point to focus on is the ISM Non-Manufacturing Employment Index.
Expectations are for this to stay in expansion at 53.7 compared to 55.6 in the prior month. We want to pay attention to the difference between this number and the evolution of payrolls and unemployment figures.
A lot of the “layoffs” registered in unemployment rolls correspond to furloughed employees who are still technically employed but are eligible for unemployment benefits.
During the lockdown, they are unable to go to work. But, presumably, they will return to their prior employment when the social distancing measures are relaxed.
The Evolution of the Trends
At the beginning of the outbreak, many investors were hopeful of a V-shaped recovery. Now, the language has shifted to a U-shaped recovery, with a longer period at the bottom.
The problem with a significant drop in PMIs is that it signals companies are cutting back on purchases due to an expectation of lower demand.
This is something of a self-fulfilling prophecy. If they expect to sell less, they buy less so they don’t have too much inventory. Therefore, they will sell less because no one is buying.
We ought to be worried about signs of a domino-effect where a drop in sales due to the lockdowns contributes to lower production and slower economic growth.