All Eyes on US Labour Market Data

Today all eyes are on US labour market data where the markets will be looking to gain an insight into the health of the US economy and the extent to which the jobs market is feeding into inflationary pressures ahead of the Fed’s meeting on 12 June.

Chief amongst the data releases is Non-farm payrolls where the general market consensus is forecasting a print of 190,000, indicating a considerable slowdown from last month’s figure of 253,000. If this figure is realised, it would mark the second lowest print since December 2020, though it would still be considerably over the 100,000 jobs needed each month to keep up with growth in the working age population. Indeed, earlier last year, Powell suggested that non farms would need to ease to some 100,000 to remain in line with population growth while not overly impacting inflationary pressures.

This comes as the markets are expecting to see unemployment tick up slightly from 3.4% to 3.5%, indicative of how investors are expecting to see a slight slowdown in the jobs market which remains historically tight. The slight slowdown in the labour market is not however expected to translate into slower wage growth which is forecast to remain in line with April’s figure of 4.4%.

The importance of today’s data cannot be understated given that many Fed policy makers are teetering on whether to pause or hike at the next FOMC meeting on 14 June. As we looked at yesterday, May’s minutes detailed how “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”. However, the minutes also indicated that “many participants focused on the need to retain optionality after this meeting” and thus their view on whether to raise rates or pause will be driven by data…not least labour market data.

Eurozone Inflation Eases

Yesterday morning, core inflation across the Eurozone came in softer-than-expected at 5.3%. This was softer than the general market’s consensus of 5.5% and marked a considerable slowdown from last month’s figure of 5.6%. When accounting for the volatile indexes of energy and food, headline inflation eased from 7% in April to 6.1% in May, again less than the market’s forecast of 6.3%. The fall in inflation was primarily driven by a 1.7% depreciation in energy prices while inflationary pressures on food also slowed from 13.5% to 12.5%. The slowdown in cost pressures meant that inflation is now at its lowest level across the currency union since the full-scale Russian invasion of Ukraine.

This comes as annualised headline inflation fell in 18 out of the 20 eurozone states, increasing only in the Netherlands.

Following the print, president Lagarde outlined in a speech that inflation was still “too high” and further interest rate rises were still needed to bring it back in line with Frankfurt’s 2% target. Indeed, as one economist at Capital Economics writes, “while further gradual declines in the core rate seem likely, we don’t think that will stop the ECB from raising interest rates in June and probably July”.

Equities Buoyed on Fiscal Responsibility Act

Investor sentiment across equity markets was buoyed yesterday following the progress made around passing the Fiscal Responsibility Act, which looks to ensure the US avoids a technical default by suspending the debt ceiling until 2025. The bill, which comfortably passed the House by 314-117 on Wednesday and the Senate yesterday now just needs to get signed off by Biden (one of the authors of the deal). For example, the MSCI world equity index which tracks shares in 50 countries, closed 1.1% higher during yesterday’s session as the Stoxx 600

and FTSE 100 closed up 0.78% and 0.58%, respectively. This was welcome news given that over the month of May, the FTSE lost 5% while Wednesday’s session saw the Stoxx 600 close at two months lows. Across the pond, yesterday’s session saw the S&P 500 close 0.99% higher while the tech heavy Nasdaq rose 1.28%. The Dow Jones Industrial Average also rose close to half a percent higher. As such, all eyes are now on US labour market data to see whether yesterday’s risk-on sentiments may continue.