US: Nonfarm payroll employment to rise at a respectable 170k pace in May - TDS

Analysts at TDS expect May nonfarm payroll employment to rise at a respectable 170k pace in May after registering a robust 211k gain in April and that will put payrolls gains well above their breakeven rate and just below the 3-month average pace of 174k.

Key Quotes

“Near record low jobless claims, several survey indicators and unwinding negative weather effects remain supportive of healthy job growth. ADP employment surprised to the upside in May; we are usually reluctant to take a strong signal from the release, but note that payrolls have outperformed the ADP print in the month of May on average since the crisis. Balancing this upside risk is the ISM nonmanufacturing employment index, which has averaged a subpar 51.5 over the prior two months and thus is consistent with job growth closer to 100k. Yet the pullback may revert as transitory factors (notably weather) could fade. Taken together, we see moderate upside risk to our payrolls forecast.”

“The unemployment rate is expected to be unchanged at 4.4%. Risks are balanced this month, as a further decline to 4.3% cannot be exclude in line with the steady above-trend pace of job gains, while a bounce back to 4.5% is possible on a rise in labor force growth. Thus the latter case would still be favorable if accompanied by higher labor force participation.”

“On wages, we look for a 0.2% m/m increase in average hourly earnings in May, factoring in some downward bias from calendar effects balanced by upside risks from further labor market tightening. That would leave the year-on-year pace slightly higher at 2.6%.”

“Foreign Exchange

The underperformance of US data versus the rest of the G10 has weighed on the greenback in Q2. The past week has seen US surprises start to stabilize. We note that US labor market surprises are an important intraday driver for G10FX. We also note that the USD continues to trail the level implied by the US versus ROW rate spreads, suggesting a string of good data (given low market expectations) could shift the negative tone towards the dollar and trigger a squeeze in positioning. With the headline print likely to remain well ahead of the breakeven level, we think the market will focus on the AHE. Indeed, softer inflation prints have in part helped flatten pricing around the Fed longer-term outlook so a modest bump in wages could provide a tailwind for the greenback into the weekend.”