Job Market Jitters

June 07, 2024

Job Market Jitters

  • US and Canada release employment figures today.
  • China’s May trade data is consistent with a modest recovery in economic activity.
  • Reserve Bank of India left the policy rate steady at 6.50% (no surprise). The vote was 4-2 to keep rates on hold versus 5-1 in April.

USD and Treasury yields are consolidating near recent lows ahead of the May non-farm payrolls data (1:30pm London). Consensus is for a 180k increase following a softer than expected 175k gains in April. With the supply of workers and the demand for labour coming into better balance, the pace of wage growth will be a bigger driver of US interest rate expectations. Average hourly earnings are forecast to rise a tick to 0.3% m/m and remain at 3.9% y/y. Faster wage growth will trigger an upward adjustment to US interest rate expectations in favour of a firmer USD. In contrast, weaker wage growth will likely reinforce the case for the Fed to start easing in September (currently 80% priced-in) and briefly undermine USD.

Canadian interest rate expectations will partly be driven today by Canada’s May labour force report (1:30pm London). Consensus sees a 22.5k rise in jobs after solid gains of 90.4k in April. The unemployment and participation rates are projected to tick-up 0.1pts to 6.2% and 65.5%, respectively. The swaps market price-in about 50% odds of a July Bank of Canada policy rate cut. The economy will likely have to shed jobs in May to raise expectations of a July rate cut.

EUR/USD is firm just under 1.0900 supported by yesterday’s ECB hawkish cut. As was widely anticipated, the ECB cut the policy rate 25bps to 3.75% but tempered expectations that an aggressive easing cycle is underway.

First, the ECB raised its headline and core inflation projections for 2024 and 2025 compared with the March projections noting “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year”. Second, the ECB lifted 2024 real GDP growth forecast 0.3pts to 0.9%. Third, the ECB emphasised it “is not pre-committing to a particular rate path” and warned “it will keep policy rates sufficiently restrictive for as long as necessary to achieve” its 2% inflation target.

Interest rate futures have virtually fully priced-in the ECB to cut rates by 25bps in September followed by another 25bps cut in December. In our view, the ECB has room to deliver those cuts because Eurozone inflation is in a firm downtrend and the recovery in economic activity remains subdued. In contrast, the bar for the Fed to shift to a less restrictive stance is higher than currently anticipated by financial markets. US core services (less housing) inflation is too high at almost 5% y/y and the labor market is cooling but remains strong. Bottom line: ECB/Feb policy divergence can further weigh on EUR/USD.

China’s May trade data is consistent with a modest growth upturn. Exports printed at 7.6% y/y vs. 5.7% expected and 1.5% in April while imports came in at 1.8% y/y vs. 4.3% expected and 8.4% in April. However, China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate domestic demand. Net exports are too small to matter.

USD/MXN is holding on to yesterday’s spike-up. The move was triggered after the leader of Mexico’s ruling party in the lower house vowed to pass sweeping constitutional and economic reforms in September. Some of those, such as increased pension payouts and minimum wage hikes, could potentially lead to expensive social welfare spending. Nevertheless, Mexico’s projected looser fiscal stance suggests real interest rate rates will remain among the highest in the EMFX universe and supportive of MXN. Moreover, underlying demand for MXN is strong as Mexico has a tiny current account surplus on top of large net FDI inflows.

Reserve Bank of India (RBI) left the policy rate steady at 6.50% and maintained its policy stance of “withdrawal of accommodation.” The decision was widely anticipated which explains the muted INR reaction. The RBI raised its real GDP growth projections and made no changes to the inflation forecasts. Nonetheless, the committee member voting split suggests the bar to loosen policy is lower. The vote was 4-2 to keep rates on hold versus 5-1 in April. Goyal joined Varma in voting for a 25bps cut. The swaps market is pricing in steady rates over the next six months followed by the start of an easing cycle over the subsequent six months as inflation is falling towards the mid-point of the RBI’s 2-6% target range.
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