U.S. NFP Preview: All Eyes on Jobs vs. Wage Growth

All eyes turn to U.S. labor market data, with Fed rate cuts firmly in focus

• Financial markets are ignoring the ECB rate decision as the spotlight stays on the Fed.
• The May U.S. jobs report is now firmly in focus, with job creation set to stay on trend.
• Attention is turning to the interplay between job creation and the pace of wage growth.

Financial markets are laser-focused on Federal Reserve monetary policy expectations. That was on display as traders yawned following the first interest rate cut from the European Central Bank (ECB) in five years. It lowered its target deposit rate from 4% to 3.75% and signaled more is to come, albeit on a firmly data-dependent schedule.

The move was broadly expected, but the guidance might have been expected to generate a bit of activity. As it happened, market participants were not interested. The euro briefly seesawed in a narrow range, then settled at familiar levels. The Euro Stoxx 50 index of Eurozone stocks did the same.

All eyes on U.S. employment data

This lack of conviction suggests the markets were not prepared to make bets one way or another as the next inflection for Fed rate cut speculation looms on the horizon: the May edition of official U.S. labor market data. It is projected to show the economy added 180,000 jobs last month while the unemployment rate held at 3.9%.

Such outcomes would fall broadly within the pace of job creation prevailing for nearly a year. However, analytics from Citigroup reveal an upturn in U.S. economic data outcomes relative to median forecasts over the past two weeks. This hints that analysts’ models are understating the economy’s vigor, setting the stage for an upside surprise.

The markets’ explosive response to service sector activity data from the Institute of Supply Management (ISM) this week might offer a clue about how to interpret the incoming figures. The headline results beat expectations handily, but the reports’ internals waved off inflationary fears. That was a potent bullish catalyst for Wall Street.

Stock markets focused on job creation vs. wage growth

A similar dynamic might be found in the interplay between the topline nonfarm payrolls and unemployment numbers weighed against the print on average hourly earnings, a measure of wage growth. That is expected to hold at 3.9% year-on-year, unchanged from the three-year low recorded in April.

If job creation is stronger than anticipated but wages remain contained, traders are likely to see a ‘goldilocks’ report and send stock markets marching higher. However, if earnings growth heats up alongside the pace of hiring, worries about a reduced scope for Fed stimulus will probably send Wall Street scrambling.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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