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The latest US labour market report (for the month of June) was strong. According to the Bureau of Labour Statistics (BLS), the US economy added 850K jobs in the month just gone, the fastest pace of monthly job gains in 11 months, above consensus expectations for the economy to have added 700K jobs on the month. Note that there was also a 15K upwards revision to each of the last two month’s NFP numbers. Gains were relatively broad-based across the US economy; private payrolls were up 662K lead by gains in hospitality and leisure of 343K, of trade and transport of 99K, whilst manufacturing posted a gain of 15K jobs. Government jobs were up 188K, which some analysts are suggesting could be related to seasonal adjustments given that normally workers would be laid off due to school closures at this time of the year, but that remote learning might have reduced this impact. “This is undoubtedly a better-than-expected outcome, which could have been helped by the surge in the student workforce now that the summer holiday season is upon us” said ING, adding “we all know companies are desperate for staff and students could have certainly helped to fill gaps”.
Despite the sharp rise in payrolls, the household survey of unemployment was not as strong and actually reported that employment fell by 18K, which, when combined with the return of 151K people into the labour market (which wasn’t enough to change the participation rate from 61.6%), pushed unemployment a little higher to 5.9% from 5.7%. By contrast, the alternative measure of unemployment (U6 unemployment) which some analysts prefer to the headline measure, fell in June to 9.8% from 10.2% (pre-pandemic levels were around 7.0%). According to BLS, the number of unemployed persons remain little changed in June at 9.5M. Both measures of unemployment, while significantly lower than the pandemic lockdown related highs seen in April 2020, remain significantly above pre-pandemic levels, when the unemployment rate was 3.5% and the number of unemployed persons stood at 5.7M. ING state that the main thing holding back employment right now is supply side issues, not the demand side; “the struggle to find staff was highlighted by yesterday’s ISM manufacturing report showing that despite booming orders and production, the employment index dropped into contraction territory in June as companies failed to recruit and they themselves had employees retire or be poached by other companies” the bank says, before also citing the a report by the National Federation of Independent Businesses (also released yesterday) which says that 46% of small business owners had job openings that they could not fill, way above the historic average of 22%.
ING thinks that the labour supply shortage, which they think will persist for at least the next few quarters, is going to push wages higher and contribute to inflation remaining above 4.0% well into 2022, raising the prospect that the Fed will start hiking rates in 2022. But there is no sign of wages taking off just yet; average hourly earnings growth disappointed in the month of June, rising at 0.3% MoM and 3.6% YoY, which puts the YoY rate of wage gains only slightly above its pre-pandemic pace which averaged around 3.0% throughout 2019 and early 2020. Since the pandemic, the distortive impact of lower wage persons become unemployed (due to their concentration in hard-hit industries such as hospitality, leisure and tourism) has sent the YoY rate of wage growth as high as 8.0%. It is unlikely wage growth will return to these levels as the labour market continues its recovery, but signs of it going above 4.0% could certainly turn some heads.
Market reaction
The market reaction has been muted. Stocks seem to have taken the jobs report as “goldilocks”, i.e. not so strong as to ruffle feathers at the Fed (after all, the labour market remains a long way from pre-pandemic levels of health and wage growth is consistent with pre-pandemic levels) and push them towards tapering their QE programme or raising interest rates sooner than markets are currently expecting, but not to so weak as to trigger any concerns about the strength of the US economic recovery. Thus, major US equity bourses are pushing on towards fresh record highs; the S&P 500 is currently in the 4330s and the Nasdaq 100 is in the upper 14.6Ks. Bond markets have hardly budged, with the 10-year yield remaining subdued under 1.45% for now and with 2-year yields a tad lower but still close to 0.25% (i.e. continuing to price in a decent but largely unchanged chance of a first Fed rate hike in the coming 2-years). The subdued yield environment, which has seen real yields little moved as well (10-year TIPS is still subdued close to -0.90%), seems to be helping stocks and precious metals.
With NFP now out of the way seemingly not changing the narrative on the US economy or Fed policy tightening timeline too significantly, gold has received a green light to reap some of the gains it arguable “should” have enjoyed prior to the release of the data amid the subdued yield environment; XAUUSD is trading at highs of the week and at one point attempted to press on towards the $1800 level, though sellers are preventing this from occurring for now. Finally, the reaction in FX markets has also been fairly muted, with the main move being some very minor USD weakness; perhaps the higher unemployment rate is being seen by some as having dovish implications for the Fed’s policy tightening timeline. The move lower in the USD, which has seen DXY drop only very slightly back to 92.50 from pre-data levels in the 92.60s, probably has more to-do with pre-weekend position adjustments and probably should not be read into too much.
Looking at the reaction of market commentators and analysts to the data, there seemed to be something for everyone, be they calling for the Fed to tighten policy sooner than expected or later, or be they calling for inflation to surprise to the upside (as ING argued above) or for the US economy to gradually return to a deflationary environment (as the Fed is arguing, a chief reason why it has been able to ignore the recent spike in the YoY rate of CPI to above 5.0%). Thus, it seems that today’s jobs report has not materially changed the narrative, meaning (unfortunately for traders) volatility over the coming sessions as market participants have more time to digest the report is likely to remain low, unlike the days after the more hawkish than expected FOMC meeting a few weeks ago.
In terms of what that means for the above-mentioned asset classes; stocks are likely to remain supported amid expectations for continued economic recovery and a Fed that will patiently and sensibly tighten policy (i.e. not rush to tighten too soon or leave it too long and allow the economy to overheat). Long-term bond yields are likely to remain relatively subdued as long as markets continue to buy the Fed’s transitory inflation argument (which the latest jobs report doesn’t really challenge too much). Short-end yields should crawl higher as the first Fed rate hike (which most market participants expect to come in late 2022 or early 2023) gets ever closer. As long as the Fed’s path to policy normalisation remains well ahead of the central banks of the US dollar’s major peers the EUR and JPY, there is a risk that the US dollar remains supported and the DXY pushes on towards the 93.00s and 94.00s. This may weigh on precious metals, though losses there shouldn’t be catastrophic as long as long-term yields remain subdued.
