Markets are close to the main risk event of the week with investors and traders awaiting Friday’s US monthly non-farm payrolls report with keen anticipation. It seems like whether you’re a seasoned pro or just starting out in the trading world, the first Friday of the month and the employment data Stateside always generates excitement with the potential for high volatility.

We’ve heard from Fed Chair Powell this week who sounded rather upbeat on falling inflation, even though he continued to express caution on the next policy move and any timings on the first interest rate cut. He did mention that risks are very much two-sided, and referring to the labour market, he said that the US is nearing a place where further declines in job openings traditionally resulted in higher unemployment. Other Fed speakers have also described the employment picture as being at some kind of “inflection point” so the NFP data will, as always, be key for rate setters going forward.  

Consensus expectations see slower but still solid job gains

Nonfarm payrolls growth saw a sharp slowdown in April, but the headline number then re-accelerated to 272,000 in May. Cooling is predicted again in June with a print of 180,000. That would be slower than the three-month average of 249,000 and the 12-month average of 230,000. The unemployment rate is expected to remain unchanged at 4.0%. Interestingly, the Fed’s June Summary of Economic Projections pencilled in a similar rate for the end of this year, rising to 4.2% next year. The rate of average hourly earnings growth is seen easing one-tenth to 0.3% m/m and 4.1% y/y.

Economists have noted the contrast between NFP and household employment with the latter going into reverse in May and little changed over the past 11 months. That stalling has been behind the rise in the jobless rate from 3.4% in April 2023 to 4%, with participation little changed. The deceleration in hourly earnings growth is also more in keeping with the household survey, cooling from 4.7% in mid-2023 to 4.1% currently. That all means that more evidence of balance in the labour market might be seen with moderation in payrolls and soft household survey employment.

Other labour market measures mixed

Weekly initial claims suggest that the gain in nonfarm employment in May won’t be duplicated in June. On continuing claims, the data that coincides with the BLS jobs report survey window rose to the highest since late 2021, which points to an easing in job growth. This has been primarily driven by a deceleration in hiring via reduced labour demand, with the job openings rate having declined noticeably, but that still has not translated into a significant rise in the unemployment rate. That said, this week’s job vacancy figures rose, and the quit rate was stuck at 2.2%. That is not sending any signals about major weakness in the labour market, even if it is consistent with ongoing moderation.

Market reaction

Further weakness in the headline print and a higher jobless rate could see markets start to bake in a September rate cut. Money markets currently see around a 67% chance of this happening.  But a very soft report could spark fears over an incoming slightly harder landing, which could upset the fairly tranquil market mood that has pervaded investors for some weeks.

A strong report would mean markets start pricing out the chances of a September rate cut. That would mean potentially aligning more with the most recent Fed dot plot of just one rate cut this year. The dollar would move higher while stocks and gold could sell-off.

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