The US Bureau of Labor Statistics is set to release the March nonfarm payroll (NFP) report on April 5, local time. As of today, the market anticipates a decline in nonfarm payrolls to 200,000 jobs for March, down from the previous figure of 275,000 jobs.
Nonfarm Payrolls and Monetary Policy
Since the beginning of the year, the Fed has continuously suppressed expectations of interest rate cuts, from March initially to the most recent expectation for June.
However, the recent consistency in speeches by Fed officials has been strong. Cleveland Fed President Loretta Mester outright stated that interest rate cuts would not be considered at the next FOMC meeting, while Fed Governor Christopher Waller further emphasized the need to reduce the frequency of rate cuts or delay their timing. Fed Chairman Jerome Powell's speech, on the other hand, was not as aggressive, stating, "We don't need to be in a hurry to cut. If we saw an unexpected weakening in the labor market, that would certainly weigh on cutting sooner."
Recently, Minneapolis Fed President Neel Kashkari made some of the most hawkish remarks, stating, "If we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all."
So, how will the labor market evolve in the near term? Is it possible to see the "unexpected weakening" mentioned by Powell?
The ADP report is often seen as a leading indicator for nonfarm payrolls. Following the release of the latest ADP report, the US dollar index fell, fueling expectations of rate cuts. Let's take a closer look to see what might happen in the US labor market this time.
Analysis of the ADP Employment Report
In February, the US private sector added 184,000 jobs, showing an increase from the revised previous figure of 155,000 jobs and significantly surpassing market expectations of 148,000 jobs.
Breaking down the data, the goods-producing sector saw an increase from the previous month's 30,000 jobs to 42,000 jobs, while the service-providing sector grew from 110,000 jobs to 142,000 jobs. Among the specific subsectors, the most notable increases were seen in leisure and hospitality, which rose from 41,000 to 63,000 jobs, and natural resources and mining, which increased from a decrease of 4,000 jobs last month to an increase of 8,000 jobs. Additionally, the construction industry recorded another month of growth, adding 5,000 jobs on top of the previous figure of 28,000 jobs.
Overall, the ADP employment report far exceeded market expectations. Wage growth has continued to rise, even accelerating, with astonishing year-over-year growth reaching 10%.
Nela Richardson, Chief Economist at ADP, commented: "The three biggest increases for job-changers were in construction, financial services and manufacturing. Inflation has been cooling, but our data shows pay is heating up in both goods and services."
While the ADP employment report provides valuable insights, it should be viewed as a reference point, and further analysis should be conducted by combining it with data from other sectors. Let's continue to deepen our understanding of the labor market following the February NFP report.
Mining Industry
Firstly, let's delve into an industry that seldom enters the public eye—the mining industry.
In February, the mining industry saw a modest increase of only 100 jobs in nonfarm payrolls. Analyzing the data further, we observe a decrease of 600 jobs in oil and gas extraction, while mining (excluding oil and gas) saw an increase of 200 jobs. Historically, the employment fluctuation in this industry has been minimal, tending towards stability.
Speaking of why we're discussing this industry, aside from the industry's unexpected growth reported in the ADP report, the most crucial aspect is its economic prosperity being closely linked to the prices of commodities, especially crude oil, coal, and metals. Currently, the high expectations of interest rate cuts by major central banks worldwide have led to record-high prices for commodities such as gold and copper. (Interest rate cuts have positive effects on both the supply and demand of commodities, such as reducing opportunity costs for holding inventories, lowering commodity costs in USD terms, stimulating demand through loose policies, and decreasing capital costs for commodity production.)
Since the start of the year, New York Gold 2404 futures have surged from a low of 1996.4 to a high of 2301 on April 4, marking a remarkable increase of 14.24%. Furthermore, New York Copper 2404 futures also hit a historical high of 4.239 on April 4. Prices of industrial metals and rare metals, among others, have also been on the rise.
Apart from the financial attributes affected by expectations of interest rate cuts by the Fed, commodity prices, including crude oil, are also influenced by supply and demand dynamics, contributing to the surge in commodity prices. Crude oil prices have rebounded recently after a sustained decline. Partially, this can be attributed to escalating geopolitical tensions, such as the conflict in the Red Sea, which severely disrupted international shipping, forcing some vessels to take longer routes and consequently increasing costs and prices.
Looking ahead, influenced by expectations of interest rate cuts and evolving supply and demand dynamics, various metal and crude oil prices are poised to embark on a bullish trend. Rising commodity prices will have a positive impact on the real economy, thereby boosting employment in the mining industry. In this ADP report, the increase in employment in the mining industry exceeded expectations. Similarly, in the upcoming NFP report, this industry might exhibit remarkable performance.
Construction Industry
Turning to the perennial topic of the construction industry, there was a significant increase in employment in the construction sector in the February NFP report, with an addition of 23,000 jobs compared to the previous figure of 11,000 jobs.
Historically, when the Fed began raising interest rates, the real estate industry was one of the hardest-hit sectors in the economy. However, there are signs of economic activity picking up, and the continually rising expectations for interest rate cuts have provided a lifeline for construction firms.
The latest data from the US Department of Commerce shows that leading indicators in the real estate market, such as new home sales, fell short of expectations in February (2.1%), declining by 0.3% month-on-month. New home sales were annualized at 662,000 units, below the expected 675,000 units.
The decline in sales volume may be attributed to a surge in supply, with new home supply reaching 463,000 units in February, the highest level since 2017. Due to ample new home supply, the median new home price in February stood at $400,500, down 7.6% year-on-year, marking the sixth consecutive month of decline.
Despite the slight decline in new home sales and prices in February due to increased supply, the underlying fundamentals of the construction industry's continued recovery remain unchanged.
It's worth noting that although employment in the construction industry is more influenced by new home sales, considering the overall US housing market, new home sales only account for 10% of total home sales. Existing home sales reached a new high of 4.38 million units in the same month, while the median price of existing homes also hit a new high, reaching $384,500. Despite a significant 10.3% year-on-year increase in the inventory of homes for sale by the end of February (1.07 million units), it still remained below a 5-month supply. This indicates that although inventory is increasing, market supply remains tight due to robust demand.
In other words, the tight supply of existing home sales will be reflected in new home sales, thereby boosting new home prices and further affecting supply. Furthermore, behind the divergence in sales volume and prices between new and existing homes lies the influence of high interest rates. Elevated mortgage rates have deterred many first-time homebuyers from entering the market.
Looking ahead, whether employment in the construction industry can continue to rise depends not only on robust demand but also on the timing of interest rate cuts by the Fed. If the Fed initiates an interest rate cut cycle, the construction industry still has the potential to be a dark horse in nonfarm payroll employment.
Leisure and Hospitality Industry
In the February NFP report, the leisure and hospitality industry saw a substantial increase in employment of 58,000 jobs, compared to the previous figure of 11,000 jobs. Specifically, food away from home recorded an increase of 41,600 jobs, surpassing the previous figure (-2,400 jobs). The surge in food away from home has been the main driving force behind the growth in the leisure and hospitality industry.
Previously, we discussed how low-income individuals had reduced their spending on food due to depleted savings. However, when considering the nonfarm payrolls and CPI inflation, it seems to reveal a resurgence in the prosperity of the restaurant industry. In February, the CPI inflation for food was recorded at 2.2% year-on-year, with food away from home inflation at 4.5% year-on-year, serving as the main driver behind the increase in food inflation.
Why is this happening? We need to consider the University of Michigan Consumer Sentiment Index and wage growth together to understand this.
In March, the Consumer Sentiment Index reached 79.4, exceeding both the previous figure and expectations (76.5). This index hit a three-year high, reaching its highest level since mid-2021, with a 2.9 increase from the previous figure, marking the largest month-over-month increase since August 2022. What's more, the much-watched short-term inflation expectations continued to decline, with the final 1-year inflation expectation at 2.9%, lower than the expected 3.1% and the previous figure of 3%, reaching a three-year low since December 2020.
Consumer sentiment is also bolstered by rising wage levels. According to the ADP report, wage growth in the private sector continued to rise in February, with wage growth for job switchers jumping to 10% year-on-year, marking the second consecutive month of increase.
The sustained rise in wages and the continuous decline in inflation expectations have led consumers' expectations for their current financial situations to reach their highest level in over two years. This means that despite real purchasing power is still affected by recurrent inflation, the decline in inflation expectations has led to increased consumer spending ahead of the market, thereby boosting consumer confidence.
Given this perspective, the surge in employment in food away from home and the rise in inflation are not surprising.
In conclusion, whether employment in this industry will increase in the future will largely depend on wage growth and people's inflation expectations. If inflation stagnates, it may have a detrimental effect on employment in this industry. It is expected that in the upcoming NFP report, employment in the leisure and hospitality industry will be comparable to the previous (February) figure.
Continued JOLTS Job Vacancies and Layoff Trend
US job vacancies for February, as measured by the JOLTS report, stood at 875.6, revised down from the previous figure of 886.3 to 874.8, in line with expectations.
Specific subcategories showing increases in job vacancies include the finance and insurance industry, state and local governments, as well as positions in arts, entertainment, and leisure. However, there were decreases in job vacancies in the information industry and the federal government.
Currently, the job openings to unemployment ratio ratio stands at 1.36, marking a four-month low and indicating continued tightness in the US labor market.
As unemployment rates rise and job vacancy ratios decline, it is expected that wage pressures will further decrease. Some signs indicate softening in the labor market, including declines in job vacancies in certain industries and layoffs reaching their highest levels in nearly a year. With a more coordinated labor market and receding wage pressures, the Fed is likely to feel more confident in cutting interest rates this summer.
The Fed has been seeking a slowdown in the labor market, preferably achieved by reducing job vacancies rather than directly increasing unemployment. As long as job vacancies remain high, wage growth may continue, potentially posing stubborn inflation risks.
Summary
Based on the analysis of the above several specific industries, the upcoming NFP report may exceed expectations due to the strong US economy. Nonfarm payrolls are expected to increase by 200,000 jobs last month after rising 275,000 in February.
Various sectors currently are influenced by rate-cut expectations, and the NFP report plays a crucial role in shaping those expectations. Amidst recent hawkish remarks from Fed officials, which continue to dampen expectations of rate cuts, any data indicating a decrease in inflation or any evidence of economic or labor market weakness will increase rate-cut expectations.
Looking back at the impact of economic data on rate-cut expectations over the past week, the US ISM Manufacturing PMI came in at 50.3 in March, far exceeding the previous reading of 47.8. Following the release of the data, the US dollar index rose steadily, closing up 0.41% on April 1.
When the US ADP employment report was released, the US dollar index recorded a doji star pattern in the 30-minute timeframe, indicating that the market didn't fully buy into the growth in employment. Although the employment increase exceeded expectations, it was still acceptable for the market.
Then, the US ISM Non-Manufacturing PMI came in below expectations at 51.4 in March. The market interpreted this as a "cooling" of the service sector, which boosted the rate-cut expectations and sent the US dollar index lower. This confirmed that any data indicating a decrease in inflation will ignite expectations of rate cuts.
This week's economic data and Fed officials' speeches, especially the hawkish remarks by Kashkari, have had a great impact on rate-cut expectations. The market is currently extremely sensitive to economic data. The nonfarm payroll data as the last important data due this week may have a decisive impact and could potentially lead to a repricing of rate-cut expectations.
Powell has mentioned several times in his speeches that if the labor market shows unexpected weakness, the Fed may consider cutting rates. In other words, if the upcoming NFP figure is flat to or slightly above the previous reading, it will only fuel rate-cut expectations, unless the data greatly exceeds expectations. If the data falls below expectations, it will greatly increase rate-cut expectations and lead to a weaker US dollar.