- Payroll report not likely to force a June 14-15 FOMC rate-hike decision
- May ISM non-manufacturing index expected to lose a little steam after back-to-back increases in March-April
- U.S. factory orders expected to show a solid increase
- U.S. trade deficit is at a 1-1/4 year low but is set to widen along with higher oil prices
Payroll report not likely to force a June 14-15 FOMC rate-hike decision — The market is expecting a relatively weak May payroll report today of +160,000, thus matching April’s report. Private payrolls (ex-govt) are expected to be even weaker at +150,000 after April’s report of +171,000. Payroll growth was very strong at an average +282,000 in Q4, but then eased to an average of +203,000 in Q1. Payroll growth then dipped to a 7-month low of +160,000 in April to kick off what could be a weak Q2 payroll quarter.
A fundamental downshift in hiring is not surprising due to (1) the ongoing profit recession and the need for businesses to reduce expenses, (2) poor labor productivity, (3) rising employee costs, and (4) continued business doubts about the health of the U.S. and overseas economies. U.S. businesses have created a net +14.2 million new jobs since the payroll trough was seen in Feb 2010 and businesses may be starting to feel as if they have hired enough people to match the current lackluster level of demand.
Yesterday’s May ADP report of +173,000 was right on market expectations. The ADP report of +173,000 suggested that today’s payroll report ought to easily exceed market expectations for private payrolls to rise by +150,000.
If today’s payroll report suggests a sustained downward shift in payroll growth, then the FOMC at its upcoming meeting on June 14-15 will be under less pressure to raise interest rates, particularly just a week ahead of the June 23 Brexit vote. Specifically, a payroll report of below about +200,000 would give the FOMC flexibility to defer a rate hike decision until after the June 23 Brexit vote. By contrast, a payroll report today of stronger than +200,000 would give the FOMC hawks a stronger argument for raising rates at the June meeting, regardless of the Brexit vote.
In any case, we believe the FOMC will not raise interest rates at its June 14-15 meeting even if today’s payroll report is strong since we believe the FOMC will want to avoid greasing the skids for the global markets in the event that UK citizens vote to leave the EU. However, if UK citizens on June 23 vote to stay in the EU and if the U.S. economic data continues to be solid, then the chances increase substantially for a rate hike in July, even though Fed Chair Yellen is not scheduled to hold a news conference at the July meeting. The federal funds futures market is currently discounting the chances for a rate hike at 22% for the June 14-15 meeting and at 62% by the July 26-27 meeting.
Meanwhile, the market is expecting today’s May unemployment rate to remain unchanged for the third straight month at 5.0%, which would be just +0.1 point above the 8-year low of 4.9% posted in Jan-Feb. The current unemployment rate of 5.0% is just 0.4-0.5 points above the FOMC’s forecast that the unemployment rate will settle at +4.6% in 2017 and 4.5% in 2018, meaning that the labor market, by one measure at least, is getting close to full employment.
May ISM non-manufacturing index expected to lose a little steam after back-to-back increases in March-April — The market is expecting today’s May ISM non-manufacturing index to show a -0.4 point decline to 55.3, giving back part of April’s +1.2 point increase to 55.7. The index showed a back-to-back gain totaling+3.3 points in March-April to post a new 4-month high of 55.7, illustrating how business confidence in the non-manufacturing sectors of the economy improved after the index suffered a 4-month losing streak in Nov-Feb. The ISM index for the manufacturing sector, reported earlier this week, rose by a stronger-than-expected +0.5 points to 51.3, which indicated some improved confidence in the manufacturing sector at least.
Meanwhile, Markit today will release its final-May U.S. services PMI report, which fell by -1.6 points to 51.2 in the preliminary report for May. That decline was a negative leading indicator for today’s ISM non-manufacturing index.
U.S. factory orders expected to show a solid increase — The market is expecting today’s April U.S. factory orders report to show a +1.9% increase, building on the March increase of +1.5% and +1.0% ex-transportation. Expectations for an increase in today’s April factory orders report are based in part of the already-released news that May durable goods orders rose by +3.4% and +0.4% ex-transportation. The ISM manufacturing new orders sub-index showed a +6.8 point surge in March to 58.3, but then faded by -2.5 points in April and by -0.1 point to 55.7 in May. Still, the May ISM manufacturing new orders sub-index of 55.7 in May was well above the boom-bust level of 50.0 and indicated that manufacturing orders are currently growing at a decent pace.
U.S. trade deficit is at a 1-1/4 year low but is set to widen along with higher oil prices — The market is expecting today’s April U.S. trade deficit to expand slightly to -$41.0 billion from the 1-1/4 year low of -$40.4 billion posted in March. The trade deficit in April narrowed to the 1-1/4 year low mainly because of a sharp -3.6% m/m decline in imports. The narrower April trade deficit will be useful in boosting Q2 GDP, but doesn’t represent any big win on trade. Indeed, U.S. exports were down -5.4% y/y in March due to weak overseas economic growth and the generally strong dollar. Imports have been even weaker than exports mainly because of lower oil prices, which have reduced the value of imported oil. However, the U.S. trade deficit is likely to see some upward pressure over the near term due to the sharp March-May rally in oil prices, which will boost the value of imports and cause a wider trade deficit. The persistent U.S. trade deficit continues to be a long-term underlying bearish factor for the dollar.
