What to Watch for in Friday's U.S. Jobs Report

Economic

Summary:

U.S. interest rate hike expectations have been flying all over the place in the past three weeks. The market has now settled on around a 25% chance of a 25bp hike on 14 June, but a strong jobs reading on Friday could easily swing things back in favour of a hike.

Markets think the Fed will "skip" June hike, but strong jobs could change that

When Federal Reserve Chair Jerome Powell opened the door to a potential Fed pause after the May FOMC meeting, financial markets swiftly priced a Fed peak with potentially 100bp of rate cuts by January 2024. However, strong jobs, sticky inflation and a raft of hawkish comments from some prominent regional Fed officials saw this completely reversed. As of last Friday a June hike has been seen as more likely than not, with perhaps just a couple of cuts priced by next January. This week though, comments from Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker reignited the prospect of skipping a hike in June and a reassessment in July. There is clearly a core group at the Fed who think 500bp of rate hikes and tighter lending conditions may mean they have done enough.

We outlined our U.S. rates view and the risks surrounding it in this report. It is that the Fed has peaked and we will get rate cuts from the fourth quarter onwards but we must acknowledge that if we get a strong jobs report and U.S. CPI comes in hot on 13 June, the day ahead of the 14 June FOMC meeting, that could be enough to tip the balance in favour of another hike.

Some data points to strong gains

At the moment, the consensus is for the economy to add 195,000 jobs in tomorrow's report, which is lower than the 253,000 outcome for April. In fact, none of the 69 organisations surveyed by Bloomberg expect payrolls to come in stronger than last month, which is a little surprising. In terms of the numbers we have seen, we know that job openings remain incredibly high and are in fact larger than the total number of Americans that regard themselves as unemployed. This means that a lack of people with the required skill sets continues to restrict hiring.

Yet today's ADP jobs release reported private payrolls rose 278k versus the 170k consensus - it is a bit of a black box model that doesn't have a great track record in predicting actual payrolls. Then we have the homebase data on hourly employed workers which was OK and the ISM manufacturing employment which pointed to modest growth. Then there are comments from St. Louis Fed economist Max Dvorkin, reported by MNI as saying that their real-time labour market index points to household employment (not the same as payrolls) rising 638k!

But other data is more cautious

Nonetheless, we continue to see the number of job lay-off announcements climb. Indeed, today's Challenger job lay-offs report for May showed 80,089 total for lay-offs, up 13,094 on April's level, giving a 286.7% year-on-year change. Hiring announcements totalled just 7,885 versus 23,310 in April. This is the lowest hiring figure since November 2021 and before then, you have to go back to February 2016 to find a lower number than reported today. Yesterday, we had the Federal Reserve's Beige Book which suggested that "Employment increased in most Districts, though at a slower pace than in previous reports".

Watch for slowing wage growth despite record low unemployment

Putting it all together, we have some very contradictory signals, meaning we have little confidence in our own 200k forecasts and an acknowledgement that pretty much anything could happen. That said, the payrolls number isn't the only figure to watch. Unemployment fell to 3.4% last month, however, it is wages that will probably get more attention given the Fed's wariness that tight labour markets could keep service sector inflation higher for longer. Last month, it rose 0.5% month-on-month, but the market expects this to slow back to 0.3%.

Nela Richardson, chief economist at ADP, commented within their report that they saw the second month where there has been a "full percentage point decline in pay growth for job changers," before adding that "pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring."

Inflation could be the clincher

In terms of consensus expectations, the market is looking for 195k jobs with unemployment ticking up to 3.5% from 3.4% and average hourly earnings rising 0.3% MoM. If we get something similar to that we are likely to see the market remaining of the view that the Fed will not change policy at the June FOMC meeting, but leave the door open for a possible July rate hike.

However, if we get a 250k+ figure on jobs and wages rise 0.4% MoM or above and unemployment stays at 3.4%, we suspect it is likely to move in the direction of a 50:50 call for a hike. That would leave the outcome determined by the May CPI report, due out the day ahead of the Fed meeting. A 0.4% MoM core CPI print would put the decision on a knife edge and could give enough ammunition to push another hike over the line.

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

In a significant development for the US housing market, the average rate on a 30-year fixed mortgage has reached its highest level in six months. According to a survey conducted by mortgage giant Freddie Mac, the rate rose to 6.79% in the week ending May 31st, 2023, up from 6.57% in the previous week. This surge is in line with the Federal Reserve's aggressive tightening measures, leading to growing market expectations of another rate hike. As a result, industry experts anticipate a potential weakening in purchase demand as rates approach the seven percent threshold. US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

Rising Mortgage Rates and Economic Outlook

The recent spike in mortgage rates can be attributed to the buoyant state of the US economy. A thriving economy has instilled confidence in the market, leading to an adjustment in the pricing of mortgage rates. Sam Khater, Chief Economist at Freddie Mac, noted that the rise in rates comes as the market prices in the likelihood of another Federal Reserve rate hike. The current rate of 6.79% is significantly higher than the fixed rate of 5.09% during the same period last year.

Impact on Housing Market

The increasing mortgage rates are expected to have implications for the US housing market. Over the past months, there has been a steady flow of purchase demand, primarily driven by attractive rates in the low to mid six percent range. However, with rates inching closer to the seven percent mark, experts anticipate a potential weakening in this demand. Higher mortgage rates generally lead to increased borrowing costs, making homes less affordable for prospective buyers. As a result, this development could potentially slow down the pace of home purchases and impact the overall growth of the housing market.

Effects on Real Estate Investments

Rising mortgage rates also have implications for real estate investors. Higher borrowing costs can reduce the affordability of investment properties and potentially affect the returns on such investments. Investors who heavily rely on financing to acquire properties may face challenges in finding favorable terms and interest rates. Moreover, the rising mortgage rates could also impact the demand for rental properties, as potential tenants may reconsider their housing choices in light of increased costs.

Federal Reserve Policy and Future Outlook

The Federal Reserve's aggressive tightening measures have played a significant role in the recent surge in mortgage rates. The central bank's actions are aimed at addressing inflationary concerns and maintaining economic stability. However, the impact of these actions on the housing market is a delicate balancing act. While higher rates can help curb inflation, they also have the potential to dampen economic activity, especially in sectors like housing. Therefore, it will be crucial to closely monitor the Federal Reserve's future policy decisions and their implications for mortgage rates and the overall housing market.

The US 30-year mortgage rate has reached a six-month high, reflecting market expectations of another Federal Reserve rate hike. This increase comes amidst a buoyant economy and the need to address inflationary pressures. However, the rising mortgage rates may weaken purchase demand as affordability becomes a concern for prospective buyers. Additionally, real estate investors may face challenges due to higher borrowing costs. It remains essential to monitor future Federal Reserve policy decisions to better understand their impact on mortgage rates and the broader housing market.

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Damon

Economic

Asian markets are looking for a positive end to the week on Friday following a solid rally on Wall Street the day before, as the U.S. debt ceiling vote passed its first congressional hurdle and hopes rose that the U.S. economy will achieve a 'soft landing'.

South Korean inflation for May is the main regional economic indicator on the calendar, and the won could also get a jolt from revised first quarter GDP growth figures. Otherwise, Friday's impetus looks set to come from Thursday's 'Goldilocks' trading on U.S. markets.

A batch of indicators suggested U.S. inflationary pressures are cooling, which could allow the Fed to pause its rate-hiking cycle later this month, while other data showed the labor market remains strong.

A win-win for risky assets.

A weaker dollar and lower Treasury yields also helped fuel the surge in U.S. stocks, with the Nasdaq and tech sector once again the highest fliers. The Nasdaq is on track for a sixth straight weekly gain, which would be its best run since 2019.

Contrast that with China, where purchasing managers index reports for May were mixed, broader economic data is weak, the central bank is expected to ease policy soon, and investors are pulling their money out of the country.

Little wonder the yuan is sliding further below 7.00 per dollar to fresh 2023 lows on a near daily basis.

The dollar's strength against the yuan on Thursday is telling, because it was not replicated across Asia. The Indian rupee registered its biggest rise in three months after PMI data showed factory activity in India grew last month at the fastest pace in two and a half years.

This follows Wednesday's surprisingly strong GDP data.

The Australian dollar had its best day in six weeks, and the Japanese yen rose for a fourth consecutive session - its longest winning streak since November.

Global markets on Friday will take their cue from the U.S. employment report for May but its release comes after Asian markets close, leaving Korean CPI and revised GDP as potentially the main market-moving economic indicators.

Annual inflation is expected to ease to 3.30% from 3.70% in April, which would be the lowest since October 2021.

Here are three key developments that could provide more direction to markets on Friday:

- South Korea CPI inflation (May)

- South Korea GDP (Q1, revised)

- Japan monetary base (May)

Source: Yahoo

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

Adnoc Logistics & Services, a subsidiary of the state-owned Abu Dhabi National Oil Company (Adnoc), has experienced a remarkable surge in its stock price, jumping by an impressive 52% after its highly anticipated initial public offering (IPO) in Abu Dhabi. This extraordinary performance reflects the market's overwhelming confidence in the company's potential and the growing attractiveness of the energy sector.

The IPO, which raised a substantial $769 million, marks a significant milestone for Adnoc Logistics & Services and further demonstrates Adnoc's commitment to diversifying its operations and unlocking value for its stakeholders. It follows the successful listing of another Adnoc subsidiary earlier this year, highlighting the company's strategic approach to capitalizing on the financial markets' favorable conditions.

Investor enthusiasm for Adnoc Logistics & Services was evident from the remarkable demand generated during the IPO. The company received orders worth an astonishing $125 billion, reflecting the strong interest from both institutional and retail investors. This overwhelming response underscores the belief in the company's growth prospects and the potential for attractive returns.

Adnoc Logistics & Services is positioned as a key player in the logistics and services sector, supporting the oil and gas industry in Abu Dhabi and beyond. With a wide range of offerings, including shipping, maritime, and onshore and offshore support services, the company plays a crucial role in facilitating the seamless transportation and distribution of energy resources. Its robust infrastructure and strong track record have attracted investors seeking exposure to the thriving energy market in the United Arab Emirates.

The successful IPO of Adnoc Logistics & Services not only provides a boost to the company's financial standing but also supports the broader ambitions of Adnoc and the Abu Dhabi government. By unlocking value through public offerings, Adnoc can raise capital to fund its ambitious expansion plans, enhance its operational capabilities, and further diversify its revenue streams.

The impressive market response to the Adnoc Logistics & Services IPO reflects the positive sentiment surrounding the energy sector, driven by increasing global energy demand, favorable oil prices, and the company's strong fundamentals. Investors are recognizing the potential for long-term growth and value creation in this vital industry, and Adnoc Logistics & Services is well-positioned to benefit from these positive dynamics.

As the stock continues to attract attention and demonstrate its potential, it is essential for investors to closely monitor the company's financial performance and its ability to execute its growth strategy effectively. Additionally, factors such as geopolitical developments, oil price fluctuations, and regulatory changes should be taken into account when evaluating investments in the energy sector.

The impressive performance of Adnoc Logistics & Services' stock following its IPO serves as a testament to the confidence investors have in the company's future prospects. It also highlights the continued attractiveness of the energy sector for investors seeking opportunities in stable and resilient industries. Adnoc's successful listing adds to the vibrancy of the Abu Dhabi stock market and reinforces the emirate's position as a leading regional hub for business and investment.

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Justin

Central Bank

Economic

Improving cross-border payments is a key priority for the G20. At the 2023 Digital Monetary Institute symposium in London, Tommaso Mancini-Griffol, deputy division chief of monetary and capital markets at the International Monetary Fund, said that Libra, Facebook’s attempt at a global currency, delivered a ‘collective shock’ to the public sector. He highlighted the inadequacies of cross-border payments: high costs, low speed and inadequate transparency.

One of the most promising solutions to these problems is the interconnection of central bank digital currency systems. This is an attractive concept because of the global surge in CBDC development. It is hoped that, as these state digital payments systems emerge, the work of creating a seamless cross-border payments system to bridge the gaps will already have been done.

Project Icebreaker versus Project mBridge

Even within this approach, however, there are different strategies. Two projects with distinct philosophies were showcased at the DMI symposium. Project Icebreaker is a collaboration between the Bank of Israel, Norges Bank and Sveriges Riksbank, in coordination with the Bank for International Settlements Innovation Hub Nordic Centre, that aims to connect retail CBDC systems. Project mBridge is a multi-CBDC platform developed by the BIS Innovation Hub Hong Kong Centre, Hong Kong Monetary Authority, Bank of Thailand, People’s Bank of China and the Central Bank of the United Arab Emirates. It is the largest multi-CBDC project involving cross-border transactions.

Both Project Icebreaker and Project mBridge are multi-CBDC platforms for cross-border payments. Both aim to reduce the costs and increase the speed of cross-border transactions. However, there are key differences in the design and architecture of the models that have implications for interoperability and scalability of the platforms .

The first and perhaps most important distinction is that Icebreaker aims to interlink domestic retail CBDCs while mBridge is a platform for wholesale CBDCs – in other words, inter-bank settlement. However, although individuals will not interact directly with mBridge, the improvements to the speed and the reductions to the cost of their cross-border transactions should still improve their experience of transacting with counterparties in participating countries.

The primary difference for retail users of Icebreaker versus mBridge relates to the integration of foreign exchange liquidity provision. Project Icebreaker is a hub-and-spoke system that connects different rCBDC systems of countries (spokes) to a hub, which serves as a marketplace for foreign exchange providers who are willing to provide settlement in more than one currency.

There are minimal technical preconditions for the rCBDC systems that connect to the hub: they must be a real-time or near-real-time payments system, be able to implement and support the use of hashed time locked contracts and have entities that can act as foreign exchange providers within the rCBDC system. Because foreign exchange providers are within the hub in Icebreaker, this ensures both competition and transparency of on-platform foreign exchange transactions.

In contrast, Project mBridge has foreign exchange off platform, which means that end users do not have access to the same degree of choice or market transparency. Making provisions to facilitate foreign exchange dealing on bridge was one of the post-pilot recommendations to improve the project. In 2023 and 2024, the roadmap for mBridge will focus on integrating foreign exchange price discovery and matching into the platform.

Flexibility and scalability

In terms of scalability, the hub-and-spoke model of Icebreaker minimises the number of connections between domestic rCBDC systems, so it can scale up to support many participating systems without increasing the complexity of the design. The hub routes payment messages and does not act on them – its only action is selecting best foreign exchange rates for the payer. Requirements to be part of the system are low, which allows central banks to have autonomy when designing rCBDC systems, but still participate in an interlinked system enabling cross-border payments.

Project mBridge, however, does not support the use of bridge currencies, which might limit the flexibility of the platform. Since it will only be able to facilitate transactions between currency pairs with liquid trading, this could limit the future scalability of the system. Integrating foreign exchange price discovery might change this. With foreign exchange liquidity provision integrated in the platform, exchanging one currency for another via a bridge currency might be accomplished as a two-part transaction relatively smoothly.

Despite being further ahead in foreign exchange liquidity provision and scalability, Project Icebreaker has so far only focused on core features with limited use cases. Before becoming a minimum viable product, Icebreaker still needs to determine a governance arrangement, anti-money laundering and counter-terrorism financing compliance and monitoring, and legal considerations regarding conflict of regulations between connected rCBDC systems.

Here, the mBridge model has clear advantages. Because of its uniquely designed distributed ledger, it uses a decentralised model to address governance considerations. As explained by Mu Changchun, director-general of the Digital Currency Research Institute at PBoC, for cross-border payments, a trustless, decentralised approach via DLT is appropriate to ensure all participating countries trust the integrity of the network.

So far, Icebreaker and mBridge have varied in architecture, technology and use of bridge currencies in the development of the two multi-CBDC cross-border payments systems Whether the two will converge or take different approaches to governance, foreign exchange liquidity provision and other factors remains to be seen.

Source: Arunima Sharan

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Justin

Central Bank

Economic

Markets think the Fed will "skip" June hike, but strong jobs could change that

We outlined our US rates view and the risks surrounding it in this report. It is that the Fed has peaked and we will get rate cuts from the fourth quarter onwards but we must acknowledge that if we get a strong jobs report and US CPI comes in hot on 13 June, the day ahead of the 14 June FOMC meeting, that could be enough to tip the balance in favour of another hike.

Some data points to strong gains

At the moment, the consensus is for the economy to add 195,000 jobs in tomorrow’s report, which is lower than the 253,000 outcome for April. In fact, none of the 69 organisations surveyed by Bloomberg expect payrolls to come in stronger than last month, which is a little surprising. In terms of the numbers we have seen, we know that job openings remain incredibly high and are in fact larger than the total number of Americans that regard themselves as unemployed. This means that a lack of people with the required skill sets continues to restrict hiring.

Yet today’s ADP jobs release reported private payrolls rose 278k versus the 170k consensus - it is a bit of a black box model that doesn’t have a great track record in predicting actual payrolls. Then we have the homebase data on hourly employed workers which was OK and the ISM manufacturing employment which pointed to modest growth. Then there are comments from St. Louis Fed economist Max Dvorkin, reported by MNI as saying that their real-time labour market index points to household employment (not the same as payrolls) rising 638k!

But other data is more cautious

Nonetheless, we continue to see the number of job lay-off announcements climb. Indeed, today’s Challenger job lay-offs report for May showed 80,089 total for lay-offs, up 13,094 on April’s level, giving a 286.7% year-on-year change. Hiring announcements totalled just 7,885 versus 23,310 in April. This is the lowest hiring figure since November 2021 and before then, you have to go back to February 2016 to find a lower number than reported today. Yesterday, we had the Federal Reserve’s Beige Book which suggested that “Employment increased in most Districts, though at a slower pace than in previous reports”.

Rise in lay-offs points to shift in payrolls

Putting it all together, we have some very contradictory signals, meaning we have little confidence in our own 200k forecasts and an acknowledgement that pretty much anything could happen. That said, the payrolls number isn’t the only figure to watch. Unemployment fell to 3.4% last month, however, it is wages that will probably get more attention given the Fed’s wariness that tight labour markets could keep service sector inflation higher for longer. Last month, it rose 0.5% month-on-month, but the market expects this to slow back to 0.3%.

Nela Richardson, chief economist at ADP, commented within their report that they saw the second month where there has been a “full percentage point decline in pay growth for job changers," before adding that "pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring."

Inflation could be the clincher

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Comments

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Damon

Economic

If the Federal Reserve does skip raising interest rates this month it's probably because it is as confused as everyone else about the health of the U.S. economy as June kicks off.

Like a patient with a virus, incoming data appears to blow hot and cold at the same time.

While a debt ceiling crisis has finally been averted, with the House of Representatives easily passing a deal overnight that lifts the limit until 2025 and the Senate expected to do likewise by Friday, there was much less clarity on the state of U.S. employment or soundings on factory activity.

Private sector and full national snapshots of payroll growth for May are due later today and on Friday. But a renewed rise in U.S. staff vacancies in April showed the labor market tightening again if anything - even a Chicago manufacturing survey alarmed with a sharp contraction in factory activity last month.

To add to the confusion from overseas, an official readout on deteriorating Chinese manufacturing in May was contradicted by an equivalent private-sector survey released on Thursday.

Yet, seemingly wary of still above-target inflation getting entrenched in wage settlements, the Fed's interest rate deliberations will likely focus mostly on the rude health of employment and record low joblessness.

The central bank's "Beige Book" on economic conditions said on Wednesday that the labor market "continued to be strong" in May "with contacts reporting difficulty finding workers across a wide range of skill levels and industries."

But while Fed hawks have succeeded in convincing financial markets more rate rises are still to come, Fed Governor and vice chair nominee Philip Jefferson held out the prospect that we may not get that additional move this month.

The upshot is a hesitant market, with futures now seeing a 65% chance of another quarter point hike on June 14 - even if a move is almost fully priced by the end of July.

Major investors tend to agree - with more and more doubting a significant recession is in fact on the way.

BlackRock boss Larry Fink said on Wednesday inflation remained sticky and the Fed may need to do more.

"The economy is more resilient than the market realizes," he said. "I don't see evidence that we're going to have a hard landing."

U.S. Treasury yields crept back up on Thursday after the debt ceiling vote overnight and despite the mixed economic picture. But Wall Street futures and European stock markets were higher ahead of the U.S. open.

The dollar was mostly steady, although it set a new high for the year against China's yuan.

Elsewhere, chair of the G20's Financial Stability Board Klaas Knot said bank regulations and how their liquidity buffers are calculated should be reviewed following recent turmoil in the sector.

In company news, shares in Salesforce fell 5% overnight after the San Francisco based firm posted its slowest pace of growth in 13 years as companies dialed back spending on cloud-based software offerings in an uncertain economy.

Events to watch for later on Thursday:

* U.S. May ADP private sector jobs report, weekly jobless claims, U.S. May S&PGlobal manufacturing business surveys, revised Q1 productivity and unit labor costs

* European Central Bank meeting minutes

* Philadelphia Federal Reserve President Patrick Harker speaks

* U.S. corporate earnings: Broadcom, Dollar General, Hormel Foods, Cooper Companies, Zscaler, Lululemon Hot, Cold and Skipping a Beat_1