As Congress haggles over stimulus to help the nation's unemployed, markets await July's employment data, which is expected to show how much impact there was on the economy from rising infection rates and renewed virus-related shutdowns across the Sun Belt.
Economists forecast 1.48 million jobs were gained in July, down sharply from the 4.8 million in June, according to Dow Jones. But the range of estimates is wide, and some economists with higher forecasts for job growth expect the negative impact of the spreading virus to possibly show up in August's figures instead.
The report is released at 8:30 a.m ET Friday.
"The question is whether the interpretation of the numbers will assuage concerns that the economy is slowing," said Quincy Krosby, chief market strategist at Prudential Financial. Thursday's unemployment claims, showing a smaller than expected 1.2 million new claims, helped calm some of those fears about a slower recovery. There were 16.1 million continuing claims last week, down 844,000.
"A number that can again allow for that to be less of a concern is going to help the markets, as well as any sense going into tomorrow that the Republicans and Democrats can carve out a deal," she said. Congressional leaders were set to meet Thursday evening to discuss the latest stimulus package, which both sides expect to be completed.
However, the respective dollar amounts of the next package continued to be far apart Thursday. The Republican-controlled Senate has proposed $1 trillion in new spending, while Democrats initially proposed a $3 trillion bill.
As for the July payrolls, economists expect a number ranging from flat or even negative to gains of more than 3 million.
Citigroup economists are forecasting one of the highest numbers of new jobs, at 3 million and an unemployment rate falling to 10.1% from 11.1%.
"This would reflect that many businesses likely continued to reopen and rehire employees in late-June and early-July," Citi economists wrote. They noted the markets are keenly focused on employment as one of the best measures of the economy's progress.
"We would expect a larger market reaction in the event of weaker, or even negative, job growth in July, as it would call into question the so far strong rebound story," noted the Citi economists. But they also said there is more potential for the markets to have either a positive or negative reaction, compared to the last few months where the risks leaned to the upside.
"July likely marks a shift to monthly employment reports becoming more indicative of the pace of the economic recovery later this year, as opposed to more-mechanical rehiring upon reopenings," they noted.
Tom Simons, Jefferies money market economist, is at the other end of the spectrum. Jefferies has a forecast of zero job growth, including the loss of 750,000 public sector workers.
"State and local government budgets are kind of a mess right now," Simons said. "There are a lot of signs net hiring is not very much." Jefferies pointed to a recent Cornell study that showed 31% of rehired workers said they were laid off again.
"The economy was opening. The jobs market was healing, and then it looked like it was beginning to stall," Krosby said. She added that there are signs of peaking cases in some states, which would be positive for the market.
Ian Lyngen, head of fixed income strategy at BMO, said one reason for a wide range of estimates is that usually reliable unemployment claims data and the monthly jobs reports have not been well correlated during the pandemic.
"The question that the market is looking to for the data to answer is whether or not the increases in Covid-19 cases are going to hurt employment. The chances are if it doesn't show up in this number, it shows up in August," he said.
Lyngen said it would not be surprising to see the jobs report miss the market's expectations.
"The stimulus then subsequently takes on a heightened relevance for market participants if we get a weak nonfarm payrolls. If the zero [forecast] wins, the lawmakers better deliver," he said.
Strategists have said one factor helping drive Treasury yields to record lows is concern the economy's rebound is shallower than expected, and Congress will not provide a big enough boost to help it.
The stimulus package is expected to address the enhanced unemployment payment of $600 a week that expired last weekend for millions of unemployed Americans. Some economists say if there is no extension of that extra payment, it would result in a slowdown in consumer spending which could further damage the economy.
Krosby said she expects there could be a compromise payment, reducing it to about $400 a week, plus another lump sum payout of $1,200. Krosby said she is now hearing from Washington policy experts that the potential bill could reach $1.7 trillion from an earlier estimate of $1.5 trillion or less.