Jobs Report Blows Away Estimates, Unemployment Rate Falls, Wage Growth Again Cooler-Than-Expected

Who wants to re-trade the Fed?

If that’s you, you’ll get your chance Friday, because thanks to Jerome Powell’s press conference, the narrative has shifted. What was, for about 30 minutes on Wednesday, a “dovish hold“, morphed into a “hawkish” story about “transitory” factors weighing on inflation. That U-turn whipsawed rates and served to reset expectations a bit, meaning subsequent top-tier data will now be viewed through a slightly different Fed lens.

The implication from Wednesday: The Fed wanted to dial back expectations for a so-called “insurance cut”, reassert its independence from an increasingly aggressive White House and ensure that the IOER tweak wasn’t interpreted as a policy signal. All of that could have been communicated in the statement and the accompanying implementation note, but Powell likes his “plain English” pressers (despite nearly every one of them having gone poorly) and so, here we are, starting down a jobs report and wondering whether it will bolster the (accidentally?) hawkish tone from Wednesday.

Do note that Powell’s comments effectively put the brakes on a much needed pullback in the dollar, which was riding a three-day winning streak headed into Friday. Eventually, dollar strength will likely be a problem and if you look at what real rates did on Thursday (red below), you have to be a bit wary about the following chart (i.e., if the dollar has been as resilient as it has in 2019 with real rates falling, what is the greenback going to do if reals start to rise again?).

Of course there’s a solid argument to be made that a cut is still far more likely than a hike when it comes to what the Fed’s eventual next move will ultimately be, and in the grand scheme of things, April payrolls isn’t particularly important. But in light of the pretty dramatic positioning adjustments that followed Wednesday’s somewhat confusing proceedings, the data has the potential to either reinforce the near-term flow reversals or else temper some of the perceived hawkishness from the presser.

As a reminder, we’re still riding a record streak of monthly gains.

For whatever it’s worth, Goldman saw the headline number printing 195k for April, with the unemployment rate unchanged at 3.8%. They were looking for AHE to increase 0.2% MoM and +3.2% YoY on unfavorable calendar effects. Barclays was even more optimistic. “We forecast nonfarm payrolls to have increased 200k in April, the unemployment rate to decline to 3.7%, average hourly earnings to have increased 0.3% MoM (3.3% YoY).

The prospect of a “rogue” AHE number took on special importance Friday following the Fed as any signs of inflation pressures will now be seen as something that Powell could cite in his quest for confirmation bias regarding the contention that inflation will eventually move sustainably to target. Additionally, all of this should be considered in light of rumors that the Fed may ultimately go down the road towards countenancing a super-hot labor market in the interest of pushing up inflation.

There are a number of Fed speakers on Friday (including Clarida) and it wouldn’t be entirely surprising to see them try to temper Powell’s message from the press conference.

The March report was obviously a big beat and wage growth cooled – so, “Goldilocks”. The market would probably appreciate something along those lines again, although it’s at least possible that “too good” on the headline would be some semblance of “bad” this time around if anyone gets the idea it will embolden Powell to rekindle the recalcitrance he exhibited for most of 2018.

And without further ado, it is a blockbuster – or at least that’s what it looks like on a quick read.

The headline print is a scorching 263k, above even the highest estimate from economists (the range was 120k-250k). The new three-month average is 169k. Retail employment declined for a third consecutive month. Construction payrolls jumped the most since January and factory payrolls were revised to flat last month (versus an initially reported decline).

The unemployment rate ticked down to 3.6% – that’s a new 49-year low.

Average hourly earnings came in cooler-than-expected at 0.2% MoM, and 3.2% YoY versus expectations of 0.3% and 3.3%, respectively. That reinforces the “Goldilocks” message and, one supposes, gives the Fed still more plausible deniability when it comes to insisting that the labor market can continue to run hot without pushing up inflation.

Notably, that relatively cool AHE print (and the assumed read-through for the Fed) could take some of the renewed upward pressure off for the dollar. “This doesn’t give anyone really anything further to go on regarding the Fed, so we should see more position squaring,” Saxo Bank’s John Hardy told Bloomberg Friday. Robobank’s Jane Foley echoed those sentiments, noting that “the data should allow the Fed to sit on its hands, offering little fresh incentive to the USD.”

In any event, all of this is likely to please Larry Kudlow, who will doubtlessly tout it as evidence of Trump’s economic genius and you can expect the administration to insist that things would be better still with rate cuts.

Estimates and priors

• Change in Nonfarm Payrolls, est. 190,000, prior 196,000
• Change in Private Payrolls, est. 187,500, prior 182,000
• Change in Manufact. Payrolls, est. 10,000, prior -6,000
• Unemployment Rate, est. 3.8%, prior 3.8%
• Average Hourly Earnings MoM, est. 0.3%, prior 0.1%
• Average Hourly Earnings YoY, est. 3.3%, prior 3.2%
• Average Weekly Hours All Employees, est. 34.5, prior 34.5
• Labor Force Participation Rate, est. 62.95%, prior 63.0%
• Underemployment Rate, prior 7.3%

Actual

• U.S. April Nonfarm Payrolls Rose 263k; Unemp. Rate at 3.6%
• Nonfarm payrolls forecast est. 190k, range 120k-250k from 79 economists surveyed
• Nonfarm payrolls, net revisions, 16k from prior two months
• Participation rate 62.8% vs prior 63%
• Avg. hourly earnings 0.2% m/m, est. 0.3%, prior 0.2%
  • Y/y 3.2%, prior 3.2% est. 3.3%
• Nonfarm private payrolls rose 236k vs prior 179k; est. 188k, range 110k-250k from 30 economists surveyed
• Manufacturing payrolls rose 4k after unchanged in the prior month; economists estimated 10k, range -4k to 20k from 18 economists surveyed
• Unemployment rate 3.6% vs prior 3.8%; est. 3.8%, range 3.7%-3.9% from 76 economists surveyed
• Underemployment rate 7.3% vs prior 7.3%
• Change in household employment -103k vs prior -201k