Non-Farm Payroll look-ahead

By David Morrison  |  31/05/2018 15:42

This article looks at the current expectations for Friday's Non-Farm Payroll release against the background of continued market uncertainty​
 
This Friday sees the release of US Non-Farm Payrolls for May. We’ll also get an update on the Unemployment Rate and Average Hourly Earnings.
Non-Farms are expected to show gains of 190,000 which would be a modest, but welcome, improvement from April’s disappointing increase of just 164,000 – again on an expectation of job gains of 190,000.  The Unemployment Rate is forecast to remain steady at 3.9% - unchanged from April and still at lows seen towards the end of 2000.

However, the labour force participation rate (which measures the number of people working or who have actively sought work in the past six months) is still relatively weak given the low unemployment rate. The concern is that there are large numbers of people who want to work but have given up looking they lack the skills required by many employers.

Recently, traders have paid particularly close attention to Average Hourly Earnings. The unexpected jump reported at the beginning of February was cited as one of the triggers for the sharp sell-off in equity markets. This was due to fears that wage increases would push inflation higher and lead to aggressive monetary tightening from the Federal Reserve. However, unless earnings come in significantly higher than the +0.2% month-on-month expected, the number could be of less importance given recent comments from members of the Fed. The US central bank has made it clear that it not only expects inflation (as measured by Core PCE) to rise above its 2% target, but will be quite relaxed about an overshoot. As far as investors are concerned, this suggests that the Fed is unlikely to tighten monetary policy more aggressively than currently forecast should inflation continue to pick up this year. Earlier today Core PCE came in at 1.8% annualised and unchanged from April’s figure which was revised down from 1.9%.

After the payroll report we have the US ISM Manufacturing PMI. This is a forward-looking indicator which means it has significance as it plays into GDP expectations. It has fallen sharply since February this year when it came in at 60.8 against 57.3 in April. The PMI is expected to recover to 58.2 but another weak number would lead analysts to downgrade their forecasts to 2nd quarter GDP. If so, expect market to dial down on Fed hawkishness. Bear in mind that that higher inflation with lower growth means stagflation - bad for bonds and equities.

But all this comes against the backdrop of concerns over Italy, Spain, Turkey and more tariff talk. While the broad-based US-focused Russell 2000 hit fresh record highs this week, the S&P 500 continues to run into resistance around 2,740 compared with an all-time high above 2,870. Support comes in around 2,680. Meanwhile, US Treasury bond yields have fallen back sharply over the past fortnight giving some relief to equity traders. However, the yield curve continues to flatten with the 2-year/10-year spread now around 42 basis points down from 54 in mid-May. This could be a much bigger concern for investors if this trend continues.
 
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