What does the first Friday of the month mean for markets? 

It means the US monthly employment report, in the form of the non-farm payrolls data. This has always been a big deal for traders, and that remains the case, even if inflation figures have recently grabbed most of the limelight. For this week at least and going forward, the emphasis switches to the Fed’s other mandate which is full employment. We will be watching out to see if the trend for a slower pace of headline job gains continues, together with benign wage growth. This could boost rate cut bets and hurt the dollar.

Consensus sees the US economy adding 180,000 new jobs, which would be in line with the prior month’s print of 175,000. Notably, this would be a step down from 377,000 in 2022 and 251,000 in 2023. Even the slight pick-up in the average during the first quarter of this year, at 269,000 per month, was followed by that softer reading in April. Another modest deceleration in the coming months would bring labour demand and supply into better balance.

With this slowdown, the unemployment rate has gradually started to tick up over the past year, though it is expected to remain steady at 3.9% in May. The Fed’s forecast for the end of 2024 currently sits at 4%, though we will get a new summary of economic projections next week at the FOMC meeting. Wage growth has also been easing and should stay at 0.3%, with the annual rate relatively subdued around 4.0%.

Other labour data mixed

Tuesday’s job vacancy (JOLTS) data showed that the number of job openings shrank of the second month in a row, setting a new three-year low amid further signals of cooling. But the quits rate – which is known as a good leading indicator of wage inflation – stayed unchanged at 2.2% for the sixth straight month. Ultimately, layoffs remain low which means net job growth is likely to continue to be positive.

Indeed, some economists think that the April NFP data was distorted by the early timing of the Easter break, as it did in 2018, when the holiday period came at the start of April. If this is the case, jobs growth could resume its upward trend. According to the most recent Beige Book, employment rose at a “slight pace overall” during the period from early April to mid-May; and a majority of Federal Reserve districts noted better labour availability, though “some shortages remained in select industries or areas.”

Market reaction

A strong report would mean markets start pricing out the chances of a September rate cut. Those odds have risen in recent days, and now sit around 65%.  The dollar would ultimately move higher while stocks and gold could sell-off.

Further weakness in the headline print and a higher jobless rate could spark increased volatility as markets latch onto potentially a slowdown, which is taking some time to arrive. A very soft report could spark fears over an incoming slightly harder landing. Focus will also turn to next week’s Fed meeting with new dot plots and projections. 

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