- Unemployment report likely to be strong enough to support a Fed rate hike
- U.S. trade deficit expected to widen to a 3-month high
- Sterling on the defensive ahead of next week’s UK election
Unemployment report likely to be strong enough to support a Fed rate hike — The market consensus for today’s May payroll report is for an increase of +180,000, down from April’s +211,000. Ideas of a stronger-than-expected payroll report today were supported by Thursday’s news that May ADP jobs rose +253,000, much stronger than the consensus of +180,000.
The payroll series may see some continued volatility after March’s weather-related payroll report of +79,000 was offset to some extent by the stronger April report of +211,000. The Fed will likely remain comfortable with a rate hike at its upcoming meeting on June 13-14 as long as today’s payroll report is stronger than about +150,000. However, the Fed seems so intent on a June rate hike that today’s unemployment report would have to be a complete disaster before the Fed would even think about delaying a rate hike.
Meanwhile, the consensus is that today’s May unemployment rate will be unchanged from April’s 16-year low of 4.4%. April’s drop in the unemployment rate to 4.4% means that the unemployment rate is already below the Fed’s forecast for a 4.5% unemployment rate during 2017-19 and is also below the Fed’s longer-run forecast of a 4.7% rate. The low unemployment rate means the Fed has essentially already met its goal of full employment.
The low unemployment rate has the Fed on guard for a surge in wages and a rise in inflation, although those increases have yet to appear. Average hourly earnings in April actually eased to a 1-1/4 year low of +2.5% y/y from the 8-year high of +2.9% posted in Dec 2016. In theory, the tight labor market should be forcing employers to pay higher wages in order to retain their workers and hire new workers. In any case, the tame level of wages is helping to keep inflation in check. The consensus for today’s May hourly earnings report is for a slight increase to +2.6% y/y from April’s 1-1/4 year low of +2.5%.
U.S. trade deficit expected to widen to a 3-month high — The market consensus is for today’s April U.S. trade deficit to widen moderately to -$46.1 billion from -$43.7 billion in March. Today’s expected deficit of -$46.1 billion would be much wider than the 12-month trend average of -$42.5 billion and would be the second highest deficit in two years.
The good news for the U.S. trade deficit is that exports have risen in recent months and were up by +7.0% y/y in March. U.S. exports are now only -4.1% below the record high posted in October 2014. U.S. exports are improving due to stronger overseas growth and the moderate decline in the dollar from January’s 14-year high. However, imports have also been strong in recent months and have prevented the trade deficit from narrowing. Imports are up +8.8% y/y and are only -2.7% below the record high posted in December 2014.
The U.S. trade deficit report has taken on much more political importance since the Trump administration is looking for opportunities to boost exports and cut imports. In March, the U.S. had trade deficits of -$24.6 billion with China, -$7.2 billion with Japan, and -$5.3 billion with Germany. With its NAFTA partners, the U.S. in March had trade deficits of -$7.0 billion with Mexico and -$1.4 billion with Canada.
The wide U.S. trade deficit continues to be a bearish underlying factor for the dollar since about $1.2 billion worth of dollars flow overseas every calendar day. However, those excess dollars are a drop in the bucket for the FX markets, which trade an average of $5 trillion worth of currencies every day with 88% of that trade involving U.S. dollars, according to the BIS.
Sterling on the defensive ahead of next week’s UK election — Sterling has fallen back in the past two weeks as the markets worry about Prime Minister May’s dwindling lead in the polls ahead of next Thursday’s UK general election. The YouGov election model currently has the Conservatives with a lead of only 4 points over Labour (42%-38%), down sharply from the 20-point lead they had before the campaign began.
The betting odds of Conservatives winning the election, and Ms. May keeping her job as Prime Minister, are still very high at 85% versus only 18% for Labor leader Jeremy Corbyn, according to PredictIt.org.
However, Ms. May’s main goal in calling the election in the first place was to boost the Conservatives’ majority in Parliament to give her a stronger hand in the Brexit negotiations. Ms. May would like to have the largest possible seat majority so that she is not hamstrung by the more radical Brexiteers in the Conservative party who might vote against a final Brexit deal. Ms. May’s gamble on new elections is looking less favorable than it did at the beginning, although at least Ms. May’s new government will not be likely to have to call a new election until after the Brexit negotiations are over.