It’s the first Friday of the month, and as every full-time trader knows, we get the release of the monthly US employment report. At present, rate setters at the Fed are currently more concerned about the inflation outlook and the price stability side of their dual mandate, due to the ongoing energy price shock from the Middle East conflict. But the jobs numbers are always important as they give markets a guide on the health of the world’s biggest economy. The data will also be of interest to the new Fed Chair at the helm, Kevin Warsh, who oversees his first meeting in a couple of weeks.
Although payrolls growth slowed in the April jobs report, the headline print surpassed estimates and kept the three-month average consistent with balance between labour demand and supply. It represented a solid pace of jobs growth and was more broad-based across sectors. The jobless rate remained steady at 4.3% as the participation rate edged down.
Consensus expectations
The headline forecast for May non-farm payrolls is for another decent gain in jobs of 85,000. This comes after the 115,000 print in April, and the big revised March gain of 185,000, though this was somewhat flattered by a boost from returning healthcare strikers which had dragged on February’s figures. The unemployment rate is predicted to remain unchanged at 4.3%, wage growth is predicted one-tenth higher at 0.3% m/m, and the annual metric is forecast two-tenths lower at 3.4% y/y.
Economists reckon education and healthcare should continue to lead job gains, followed by trade and transport. Warm weather should support jobs in leisure and hospitality, and construction for the third straight month. The current breakeven pace of job creation is now no higher than 10k per month. That means even a modest headline print should be enough to keep the unemployment rate from rising further, due to the current low labour supply growth environment. This is essentially due to the supply shock from tighter immigration policies. In fact, we don’t need high rates of payrolls growth to even see the jobless rates decrease.
Other employment indicators
Six of the nine regional Fed surveys that measure both manufacturing and non-manufacturing activity indicated that employment growth improved in May compared to April, although this was still below the pace seen in March. The four-week average of initial jobless claims, the main high frequency indicator of inflows into unemployment, has stayed through May around the lows seen over the past year-and-a-half, while continuing claims which is a high frequency metric of unemployment, has also settled around recent troughs near the lowest level since April 2024. This points to a strong labour market, which Tuesday’s backward-looking JOLTS job vacancy data also confirmed.
Recent Fedspeak on jobs
Fed officials have recently been gaining confidence in the stability of the labour market, partly due to shifting views on labour supply. Indeed, the balance of risks has now moved towards faster inflation and tighter monetary policy. Last week, Kashkari and Schmid leaned hawkish after the strong April PCE inflation print, while Bowman, a known dove, noted that a prolonged Iran-related energy shock could change her rate outlook. Meanwhile, Paulson and Daly both see policy as well positioned but note that a lasting conflict and higher oil prices are key upside risks to inflation that could increase the need for further tightening.
Money market pricing & reaction
Money markets now see a coin flip chance of a rate hike by year-end. That implies around 13bps of hikes priced in. Pre-conflict, roughly two quarter point rate cuts were forecast in 2026 while even just a month ago, there was only around a 9% chance of a rate hike.
The US economy remains resilient while the labour market is stable and appears to have bottomed out. A very weak headline, rise in unemployment alongside softer wage growth would be needed to shake the dollar out of its current range. The 50-day simple moving average has acted as support at 98.89 on the Dollar Index. The flip side is if payrolls come in firmer again for a third month in row, and wages pop higher. Resistance on the DXY sits around 99.50. The Fed will also be mindful of next week’s potentially hot inflation data ahead of the FOMC meeting on 17 June.