In the week ahead, traders will be keen to parse May payrolls for clues as to whether April’s downside NFP “shocker” was a fluke or indicative of pervasive imbalances in the US labor market.
Those critical of the White House’s economic agenda seized on last month’s lackluster jobs report to bolster the narrative that says the extension of generous unemployment benefits risks hampering the recovery by discouraging workers from accepting “good” job offers. At the least, a record disparity between vacancies and hires lends credence to anecdotes from business owners increasingly prone to fretting over a shortage of qualified applicants. Some industries are now rushing to offer incentives and (gasp!) higher pay to lure workers from the sidelines.
At the same time, jobless claims continue to hit fresh pandemic lows. Initial claims fell in six of the last seven weeks.
Consensus is looking for around 670,000 on the headline NFP print this week. I, for one, will be interested in the revisions. Remember: April’s headline missed the lowest estimate by more than 400,000 jobs.
If May’s report matches estimates or beats, it’ll be easier to dismiss April as a mere stumble along the road to recovering the ~8 million jobs needed to reclaim pre-pandemic levels of employment.
Average hourly earnings will be watched closely. The story there remains largely the same. Many of the sectors hit hardest by the pandemic were industries where pay is traditionally low, so there’s a sense in which a decline in average earnings can be seen as a positive development to the extent it’s indicative of those industries making a comeback.
“The pace of the recovery and subsequent sustainability of inflation is unquestionably a function of the ability to reengage the front-line service sector workers,” BMO’s Ian Lyngen said. “The germane unknowns are the degree to which investors will be convinced by May’s data in either direction,” he added, noting that “if the durability of the range in US rates is any evidence, we struggle to imagine there will be anything on offer during the approaching holiday-shortened week that would trigger a paradigm shift.”
An in-line read Friday would bring the three-month average to around 570,000. Lyngen went on to say that once you adjust for labor force growth, that pace suggests it’ll take another year and a half to recover all the “missing” jobs.
Market participants will also need to contextualize payrolls vis-à-vis the Fed’s reaction function. Nods to the commencement of the taper discussion (and remember, forward guidance has become so recursive that the Fed now has to give the market advance notice not just of the actual taper, but of the debate around the taper) are likely to continue barring some manner of unforeseen shock.
April’s NFP miss ostensibly helped allay fears of an “early” taper, but at least in the minds of some, the CPI scorcher quickly offset the jobs disappointment when it came to what the macro is purportedly “saying” about the urgency of trimming monthly bond-buying. Surging inflation expectations in consumer surveys and the usual charges that asset purchases are feeding distortions in everything from housing to equities to funding markets, pile still more pressure on Jerome Powell and colleagues.
Almost invariably, ISM manufacturing and services (both due this week) will come packaged with more color on supply chain disruptions and soaring input prices, further feeding the inflation narrative ahead of payrolls.
“After a disappointing April print, there’s a lot riding on a rebound in the May employment figures,” SocGen remarked. “With most states gradually returning to normal, expectations are high for this optimism to be reflected in the incoming data.” The bank predicts “a volatile summer as bottlenecks on employment and price pressures related to supply chain disruptions are ironed out.”
More broadly, central banks seem anxious to start dialing back stimulus. That might sound absurd considering the very real possibility that monetary policy will never return to anything like a pre-2008 “normal,” but as TD put it, “there has already been a not-so-subtle shift in central bank buying programs in recent weeks.” The BOC and the BOE are moving down the road to tapering, for example. The figure (below) shows TD’s outlook for supply and central bank purchases.
“A large portion of the additional supply issued in 2020 due to COVID-19 was absorbed by central banks… remov[ing] a key source of duration pressure from the private market,” the bank’s Priya Misra said, adding that “the backdrop has begun to shift in some countries and will do so in other countries over the next year.”
Commenting in a note dated May 24, Deutsche Bank’s Alan Ruskin said that “if the Fed shifts hawkish on tapering… it would be an explicit acknowledgment that they were wrong on the rebound in inflation and an implicit acceptance that the business cycle may be more advanced.”
Ruskin, striking a semi-cautious tone, noted that if “the cycle is more advanced, as output gaps and asset valuations would suggest, then policy rate expectations can shift more in the US than most G10 countries.”
You get the point. As dramatic as all this sounds, the bottom line is that this week will be spent debating the exact same things everyone debated last week, only with the most consequential macro data point in the world (US payrolls) in the mix.
Craig Torres and Joe Deaux, writing for Bloomberg on Saturday, conjured a line that could have walked right out of Heisenberg Report. “Economic models, and humans generally, like to draw smooth lines and curves to describe the future,” they said. “But consider that tendency in light of the jagged peaks and valleys in the data caused by the pandemic.”
I’d say tail wagging the dog, but I’m not sure which is the tail and which is the dog anymore.