Jobs Report Beats

Ok, so Trump took all the drama out of the NFP print this morning when he tweeted the following:

Clearly, that portends a ‘bigly’ beat.

No but seriously, Thursday’s afternoon Mueller bombshell actually makes this morning’s jobs report a bigger deal than it otherwise would have been for yields and the dollar.

Needless to say, the greenback was already on the back foot, but the latest escalation in the special counsel investigation gave traders another reason to be wary. The broad dollar’s down four of the last five days and in case you missed it, it’s down every single month since April 12 when Trump proclaimed the stronger dollar was a measure of the world’s confidence in him:

As for yields, here’s a summary from Bloomberg that documents the extent to which the reaction in Treasurys to NFP has been fleeting:

Of past six employment reports, four produced UST market reactions that were subsequently erased by end of day; NFP numbers below are as reported, not revised.

• June data released July 7: NFP rose 222k vs 178k est.
  • USTs advanced as average hourly earnings rose less than forecast, however gains were not sustained; 5s30s curve steepened sharply from YTD lows as long-end yields climbed; 10Y yield closed higher by ~2bp
  • S&P 500 gained 0.6%
• May data released June 2: NFP rose 138k vs 182k est.
  • UST yields fell led by 5Y and 10Y as report had little impact on expectations for June rate increase; 10Y yield declined as much as 7bp, closed lower by 5.2bp at lowest level since November
  • S&P 500 climbed 0.3% to a then- record high
• April data released May 5: NFP rose 211k vs 190k est.
  • UST yields initially climbed, then retreated as attention turned to downward revisions to March data and unexpected drop in y/y average hourly earnings
  • 10Y yield plied a 4bp range during 15 minutes after the release, closed lower by less than 1bp
  • S&P 500 rose 0.4% to a then-record high close
• March data released April 7: NFP rose 98k vs 180k est.
  • UST yields fell to session lows, then immediately rebounded as focus shifted to the unexpected drop in the U.S. unemployment rate to the lowest level since 2007
  • 10Y yield closed higher by 4.1bp; 11bp daily range was the biggest since Dec. 14
  • S&P 500 fell less than 0.1%
• February data released March 10: NFP rose 225k vs 200k est.
  • USTs gained as data was viewed as affirming expectations Fed would raise rates on March 15 without leading the market to price in more than two additional hikes in 2017
  • 10Y yield closed lower by 3.1bp
  • S&P 500 rose 0.3%
• January data released Feb. 3: NFP rose 227k vs 180k est.
  • Report spurred gains based on 0.1% increase in average hourly earnings vs 0.3% forecast, which were erased after San Francisco Fed President Williams said there was an argument for raising rates in March
  • 10Y yield closed lower by less than 1bp
  • S&P 500 rose 0.7%

And don’t forget that last week’s ECI miss will add some urgency to this morning’s AHE print which is already subject to relentless parsing. “AHEs are not likely to impact policymakers’ intermediate-term inflation expectations all that much, especially in light of the Q2 employment cost index, which continued to point to more of the same in terms of muted wage inflation,” Deutsche Bank wrote late last week. You have to kind of read that backwards. That is, what Deutsche is saying is that an AHE beat wouldn’t matter that much in light of the ECI number, but if you flip that around, it means that an AHE miss would make the inflation outlook even more indeterminate (so if you’re long stocks, hope for a giant AHE disappointment).

Here’s Goldman’s brief take:

We estimate nonfarm payrolls rose 190k in July, following a 222k increase in June and compared to three- and six-month moving averages of 194k and 180k, respectively. Labor market fundamentals were generally strong in July, including a 2-year high in our services employment survey tracker and a 16-year high in the conference board labor market differential. On the negative side, initial jobless claims edged up slightly, and continuing claims rose 20k from survey week to survey week. We estimate the unemployment rate declined to 4.3%, as the June rate barely rounded up to 4.4%, and we believe underlying job creation remains well above the trend in labor force growth. Finally, we expect average hourly earnings to increase 0.3% month over month and 2.4% year-over-year, reflecting diminished labor market slack and favorable calendar effects.

We expect average hourly earnings to increase 0.3% month over month in July, which would leave the year-over-year rate down a tenth from June at +2.4%. Our forecast reflects continued firming in labor markets as well as favorable calendar effects. The July pay period ended on the 15th and the month also had two fewer workdays relative to June, both of which should boost seasonally-adjusted wage growth at the margin. On the negative side, we note the possibility of mean-reversion in the construction and information industries following above-trend wage growth in recent months. While wage growth has disappointed this year across multiple measures, we believe much of this weakness has been concentrated at the high-end, whereas we find that wage growth in the bottom-half of the income distribution is relatively high and appears to be accelerating. To the extent that wage growth is more persistent in the lower and middle tiers of the income distribution, this would suggest scope for resilience in aggregate wage growth going forward.

And here’s a pretty good transatlantic comparison via Bloomberg’s Kristine Aquino:

Both sides of the pond are abuzz with discussions about wage growth. In the U.K., the BOE cut its forecast for 2018 pay rises yesterday. Meanwhile, in the U.S., we’re awaiting July payrolls data, of course. After pacing each other in 2015 and 2016, inflation-adjusted wage gains in the U.S. and U.K. are diverging — and America has the edge.  Could a sustained pickup in wage growth help revive the USD from this year’s slump? At the least, it would surely help boost confidence in the U.S.

Whatever, right?

Here are the estimates and priors:

• Change in Nonfarm Payrolls, est. 180,000, prior 222,000
• Change in Private Payrolls, est. 180,000, prior 187,000
• Change in Manufact. Payrolls, est. 5,000, prior 1,000
• Unemployment Rate, est. 4.3%, prior 4.4%
• Average Hourly Earnings MoM, est. 0.3%, prior 0.2%
• Average Hourly Earnings YoY, est. 2.4%, prior 2.5%
• Average Weekly Hours All Employees, est. 34.5, prior 34.5
• Labor Force Participation Rate, prior 62.8%
• Underemployment Rate, prior 8.6%
• Trade Balance, est. $44.5b deficit, prior $46.5b deficit

And without further ado, here it is:

• U.S. July Nonfarm Payrolls Rose 209k; Unemp. Rate at 4.3%

• Nonfarm payrolls forecast est. 180k, range 125k-220k from 84 economists surveyed
• Nonfarm payrolls, net revisions, 2k from prior two months
• Participation rate 62.9% vs prior 62.8%
• Avg. hourly earnings 0.3% m/m, est. 0.3%, prior 0.2%;

• Y/y 2.5%, prior 2.5% est. 2.4%
• Nonfarm private payrolls rose 205k vs prior 194k; est. 180k, range 100k-210k from 38 economists surveyed
• Manufacturing payrolls rose 16k after rising 12k in the prior month; economists estimated 5k, range -3k to 12k from 18 economists surveyed
• Unemployment rate 4.3% vs prior 4.4%; est. 4.3%, range 4.2%-4.5% from 78 economists surveyed
• Underemployment rate 8.6% vs prior 8.6%
• Change in household employment 345k vs prior 245k