Jobs Report Misses Lowest Estimate Boosting Rate Cut Bets

May’s jobs report is ostensibly critical, but thanks to the latest developments in US monetary policy and the trade war, nobody is quite sure what would constitute “Goldilocks”.

Expectations for rate cuts are now rampant, and those expectations are in part responsible for the best week for US equities since November. So, a headline payrolls number that was “too good” would have risked undermining the case for rate cuts, and that would have gone double if average hourly earnings came in “too” hot.

On the other hand, an extremely disappointing number might well underscore concerns about the health of the US economy amid a series of escalations in the trade war. On Wednesday, we got the worst ADP report in more than nine years and the latest read on ISM manufacturing was the worst print of Trump’s presidency.

As to whether anyone should be concerned about the ADP data, Goldman thinks the answer is no. “We estimate nonfarm payrolls increased 195k in May, as employment surveys remain at healthy levels and the payroll survey period largely preceded the recent trade war escalation”, the bank wrote Thursday, reiterating their forecast from last week. “We place very little weight on the ADP report this month, because most of its deceleration reflected statistical noise as opposed to actual hiring weakness in the ADP panel”, Goldman added.

Most other desks were similarly optimistic headed in.

Ultimately, the report missed across the board. The headline (75k) was a large downside miss and below the worst estimate from 77 economists. Both the March and April prints were revised lower (to 153k from 189k and to 224k from 263k, respectively). Those revisions aren’t welcome news unless of course you’re hoping the previously bulletproof labor market finally rolls over so that Powell relents.

Unemployment held at 3.6%, and average hourly earnings came in cooler than expected, which is, one supposes, a boon to the rate cut narrative.

With the employment picture now darkening and wage growth still subdued despite the unemployment rate holding at a five-decade nadir, the case for Fed cuts is clearly growing and you can expect the market reaction to the May report to reflect that.

Indeed, the dollar promptly dropped and 10-year yields fell to 2.053% (a fresh “lowest since September 2017” moment) following a large block trade.

With some desks calling for cuts as soon as next month, the pressure on Powell to cut at the June meeting in order to deliver a “dovish surprise” is growing. These numbers help make the case, although it’s by no means clear it will be enough to force the notoriously recalcitrant chair’s hand.

It’s also worth noting that these numbers suggest the jobs market was cooling prior to the Mexico tariffs escalation, which, if it’s not resolved, might well weigh further on the domestic economy in June.

Estimates and priors

• Change in Nonfarm Payrolls, est. 175,000, prior 263,000
• Change in Private Payrolls, est. 174,000, prior 236,000
• Change in Manufact. Payrolls, est. 3,000, prior 4,000
• Unemployment Rate, est. 3.6%, prior 3.6%
• Average Hourly Earnings MoM, est. 0.3%, prior 0.2%
• Average Hourly Earnings YoY, est. 3.2%, prior 3.2%
• Average Weekly Hours All Employees, est. 34.5, prior 34.4
• Labor Force Participation Rate, prior 62.8%
• Underemployment Rate, prior 7.3%

Actual

• U.S. May Nonfarm Payrolls Rose 75k; Unemp. Rate at 3.6%
• Participation rate 62.8% vs prior 62.8%
• Avg. hourly earnings 0.2% m/m, est. 0.3%, prior 0.2%
  • Y/y 3.1%, prior 3.2% est. 3.2%
• Nonfarm private payrolls rose 90k vs prior 205k; est. 174k, range 94k-200k from 29 economists surveyed
• Manufacturing payrolls rose 3k after rising 5k in the prior month; economists estimated 3k, range -4k to 14k from 18 economists surveyed
• Unemployment rate 3.6% vs prior 3.6%; est. 3.6%, range 3.5%-3.8% from 74 economists surveyed
• Underemployment rate 7.1% vs prior 7.3%
• Change in household employment 113k vs prior -103k