News & analysis

Today’s US nonfarm payrolls release overshot expectations to print at 272k, above the 180k anticipated by markets, and well in excess of the 165k jobs added in April.

Accompanied by a household survey that also pointed to sticky inflation pressures on balance, today’s jobs report leaves the prospect of a July rate cut from the Fed dead in the water. The growing question in advance of next week’s Fed meeting is now whether policymakers will be able to cut rates this year at all. On this point, multiple Fed members have now set out broadly similar conditions for the commencement of policy easing– either there needs to be a significant weakening in the labour market, or the Fed needs to see multiple more “good” inflation prints.

The first of these options now looks unlikely, though we think the second remains possible in the coming months. Given this, we continue to look for rate cuts from the FOMC in both September and December, albeit risks to this view are skewed to less easing, if slow disinflation progress continues to persist through the summer months.

Looking through the details of today’s report, both the establishment and the household survey lean in a hawkish direction. In the case of the former though, this is unambiguous. Not only did the establishment survey far exceed expectations with the number of jobs added, but the details of the report will also be concerning for the FOMC. Specifically, several typically low wage sectors saw notable rises in employment, suggesting that labour demand continues to remain robust. Within healthcare, which added 68,000 jobs in total, employment growth was concentrated in ambulatory health care services (+43,000), while employment in leisure and hospitality (+42,000) was also a standout for job gains. This likely contributed to the acceleration in wage growth, which ran contrary to expectations by doubling on a monthly basis to 0.4%, leaving the annual rate to rise from 4% to 4.1%.

In contrast, arguably the one soft spot in today’s figures comes from the household survey, where the unemployment rate rose from 3.9% to 4.0%. Even so, this is still significantly below most estimates of neutral for the US economy, signalling that the economy is merely moving slowly towards better balance, rather than the labour market unwinding outright. Moreover, as previously mentioned, average hourly earnings rose in May, increasing by 0.4% MoM and 4.1% YoY. This was above both the 0.3% and 3.9% anticipated by markets, and the 0.2% and 4.0% recorded for each reading the month prior.

Not only does this leave wage growth continuing to track above the 2-3% range typical in the pre-Covid period, but also sees it moving in the wrong direction, at least temporarily, with both factors suggestive that inflation pressures are likely to remain sticky in a continuing concern for the Fed. That said, we would note that today’s jobs report stands in contrast to several other recent labour market indicators.

ADP employment change dropped sharply from 192k to 152k in May, the NFIB small business hiring intentions indicator has also pointed to a sharp slowdown in job additions over recent months, while at 47.1 the employment index of the ISM services PMIs remains some distance below the 50.0 no change mark. While this leaves a risk that May’s employment strength could be revised away in the coming months, this is unlikely to be factored into the Fed’s thinking. Given this is the last major data point before Fed members lock in their latest economic projections next week, the strength in employment all but confirms a hawkish revision to the FOMC’s forecasts next week, where we expect a median projection of just two rate cuts this year and a risk that there could be an even more hawkish revision. Moreover, given the strength seen in today’s release, it should kill off any chances of a July rate cut as well. This is all being reflected in market pricing post-release too.

The odds of a July cut have slipped from 20% to just 7%, with traders now expecting just 1.6 rate cuts for 2024 as a whole, having previously had almost two rate cuts fully priced. This paring of rate expectations has seen the broad dollar rally 0.6% with potential for the move higher to extend next week should May’s inflation data also prove bumpy and Fed Chair Powell choose to offer some hawkish forward guidance in light of today’s figures.

Traders sharply pared back Fed easing expectations following today’s jobs report, almost entirely pricing out the risk of a rate cut in July



Nick Rees, FX Market Analyst


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