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Research Note: US May Employment Report
Brian Dolan, Chief Currency Strategist
Jacob Oubina, Currency Strategist
Summary Outlook: Tomorrow, Friday, June 5 at 0830EDT/1230GMT will see the release of the US NFP report for May. Consensus forecasts are for a NFP change of -520K (prior -539K) and for an increase in the unemployment rate to 9.2% from 8.9%. Our model suggests a slightly better report, with a NFP change of -507K and an increase in the unemployment rate to only 9.1%.
Trading Strategy: The market seems inured to the ongoing deterioration in the US labor market and continues to embrace the theme of economic recovery, buying stocks, commodities, and carry trades (JPY-crosses) and selling the USD and US Treasuries as risk appetites improve. We think a NFP change of worse than -550K will be needed to alter the current risk seeking mind-set. Such fresh weakness would be worse than the April NFP change and mark a break in the string of smaller job losses since the January report and possibly undermine the notion that the worst of the jobs outlook is past. A worse than expected report would likely see stocks and JPY-crosses decline, while the USD may perform better excluding USD/JPY. An 'as expected' or smaller-than-expected NFP change (e.g. fewer than -500K) would very likely be interpreted as confirming that the rate of job cuts in the US has peaked and that conditions will improve in the months ahead. Such a result would likely embolden risk-seekers and see stocks, commodities, and carry trades gain further ground, while the USD would likely remain under pressure. As always, the revisions to prior period data will be important, but we think the market will respond mostly along the lines of "Is the jobs picture getting better or worse?" and revisions tend to exert less of a pull in such a relative environment.
Data Analysis: The economic data we have in hand suggest we will print a better than consensus -507K nonfarm payroll decline in May. The market is looking for a -520K result and the estimates range from a low of -600K to a high of -450K. One of the more improved indicators of late has been the ISM employment composite (manufacturing and services) and this rose again to 37.8 from 36.4 in April and 31.3 in March. While still at a dismal level, the number at least suggests the pace of job declines continued to slow. The other improvement was in continuing claims which rose by 355K in May after increasing 530K the prior month. So the ranks of the unemployed grew at a much slower rate as well. The unemployment rate is poised to continue its upward trajectory nonetheless. We are looking for a lower than expected rise to 9.1% in May from 8.9% the prior month. Consensus is 9.2% and forecasts range from 9.0% to 9.4%. The insured unemployment rate for the month of May rose by 0.2 percentage points to 5.0% after jumping by an average 0.4 point clip in the three months prior. So the unemployment rate increases are also decelerating. It still seems all but certain that we will peak somewhere above 10.0% before all is said and done on the employment front –but it will take a bit longer than previously expected.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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