NFP Focus on Labour Tightness

Analysts are a bit more optimistic about the US labour market this time, but will the data release shake up the outlook for the Fed?

The Fed Pivot to Labour Data?

The data releases from the US labour market for June are more compressed due to the holiday earlier in the week. ADP and JOLTs figures typically factor into last-minute adjustments to analysts' forecasts for the NFP figure, which won't be released until later today. This could open the market to more volatility, with a more shaky consensus. On the other hand, the outlook for the Fed is pretty firmly in consensus that there will be a hike at the next meeting. It would likely take a significant miss of expectations to shake up the market outlook under the current circumstances.

Economists have been consistently underestimating the resilience of the US labour market, which has been thrown off kilter by a considerable disparity between the number of people looking for work and the number of job openings. In April, the last month for which we have data, that difference actually increased with a surprise jump in the number of job openings. If that trend continues through the subsequent months, then NFP is likely to surprise to the upside. But, with over 90% of traders expecting a rate hike at the next FOMC meeting, there isn't all that much headroom.

The Outlook on Labour Tightness

The consensus is that the US added 250K jobs last month, down from the 339.0K reported in May. The unemployment rate is projected to stay put at 3.7%, whereas Average hourly earnings are forecast to decline to an annual growth of 4.1% compared to 4.3% prior. With the inflation rate falling to 4.0%, doubling the Fed's target, the fact that wages are now growing above the CPI rate could become a problem.

Fed Chair Jerome Powell discussing labour tightness as a problem, which could become an increasing focus for the Fed. Even as the headline inflation rate is coming closer to target, tightening could remain an option if job numbers don't also start to show some weakness. A good NFP report could initially boost risk appetite, suggesting the US could avoid a hard landing - but growth in equities could be short-lived if bond markets move to price in more hikes after July.

Dow Jones Leaves Pennant Behind

The defensive stocks index, Dow Jones (Wall Street)) has lagged behind the S&P 500 and Nasdaq this year. However, it printed a pennant recently, putting a low in at 32580 for an upward spiral expected to break to fresh yearly highs. The typical extension is the measured-move projection, which lies around 37300 in the longer term, a new record high. In such an event, bulls must reclaim 34930, 35500 and the current all-time-high (ATH) at 36950. Conversely, sliding back down without a decent attempt at breaking higher will increase the chances of pattern invalidation. Falling under the short-term support of 33600 will expose 32580, which might provoke further bets towards the 2023 low of 31430.

Source: SpreadX / Wall Street

Key Takeaways

Economists are cautiously optimistic about the US labour market, but the upcoming data release could impact the Fed's outlook. The US labour market has surprised economists with a significant disparity between job seekers and job openings. If this trend continues, the NFP report may exceed expectations. However, with the majority anticipating a rate hike, there may be little room for upside surprises. The consensus is that 250K jobs were added in June, with the unemployment rate expected to remain steady at 3.7%. Fed Chair Jerome Powell has expressed concerns about labour tightness, indicating it could become a focal point for the Fed. Average hourly earnings are projected to slow while inflation rates increase. A positive NFP report may temporarily boost risk appetite, but if bond markets project more rate hikes after July, equity growth could be short-lived.