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US May NFP: On the Path to Easing?

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Analysts are expecting May NFP to come in softer once again. After months of underestimating the job creation potential of America, the miss last time around seems to have restored analysts’ confidence in providing a downbeat forecast. But by lowering the bar, it makes it easier for there to be a beat that could boost the markets.

The consensus is that US May NFP will come in at just 151.0K, down from 175K prior. Generally, it’s above 180K that is considered a bullish number, so if the forecasts are matched, it would signal softening in the labor market. But, it still would be a sign of growth. Slower than before, to be sure, but it wouldn’t be an outright negative sign.

What the Market is Focusing On

Over the last month, the market has gotten a series of data points heavily inclined to supporting a narrative that the Fed will start easing soon. That puts the market predisposed to expecting an affirmation of a weaker jobs market that would keep that narrative going. The big data point was inflation falling compared to the prior month, and Core PCE continuing its slow descent.

Though the Fed seems adamant about keeping the market uncomfortable about the forward rate path. The gist of the series of FOMC members who have spoken over the last couple of weeks is to stick to the theme that inflation is not convincingly declining just yet. More data is needed. Markets might take solace in a second consecutive month of softer jobs data as that missing data that’s needed to get the Fed on the easing path.

The Data that Matters the Most

The central issue for the Fed and therefore the markets is the upward pressure on inflation coming from wages. Since inflation fell below the rate of wage increases, strong wage growth can be an obstacle to bring down inflation. So, the market will be looking for signs of “loosening” in the labor market.

The JOLTS report earlier in the week provided some bad news on that front, as it showed that open jobs still significantly outpaced the number of people looking for work. But, more importantly, it essentially said that the labor market situation remained unchanged for the month. The key metric is the number of quits and rehires, since that shows how easy it is for workers to get a new (better paid) job. And that ratio also remained unchanged, showing that the labor market remained just as tight as it was before in April.

Getting Wages to Toe the Line

The data point that might be the most relevant is the average hourly earnings figure, which is expected to be unchanged at 3.9% annual growth. A drop in that figure would likely be understood as a sign that the labor market is loosening, as workers take on smaller salary increases out of concern that they won’t be able to get a better alternative.

The unemployment rate is expected to remain unchanged at 3.9%. That is generally understood to be below the structural level, and contributing to tightness in the labor market. So another uptick in the job seeker rate could be seen as another sign of loosening labor markets. That’s seen as the key element the Fed is looking for to feel confident that the economy isn’t running too hot and they can finally start easing.

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