NFP Could Signal a Rate Hike

Now that there is a deal on the debt ceiling, markets can turn back to worrying about something else: The chances that the Fed will hike into a recession if job numbers are unexpected.

Beating Expectations Undeterred

Analysts have a months-long track record of underestimating how many jobs the US economy can create. Once again, the consensus is for 180K jobs created last month. That was the same number forecast for April, when the actual number was 253K, supporting overall market growth. Reportedly, if the jobs creation level is above 200K, it could push the Fed towards raising rates in June instead of the widely anticipated pause due to the communication the FOMC made after the last rate meeting.

Just under two weeks before the next rate decision, over 66% of traders expect a hike from the Fed at the June meeting. This is a sharp contrast from when the numbers were reversed a week ago, with the majority favouring a pause. Part of that can be seen in renewed optimism after a debt ceiling deal was reached over the weekend, letting yields drift lower as safe-haven bets unwound somewhat. There are still some obstacles for the deal to make it to President Joe Biden's desk, but that could happen as soon as Friday, which, if combined with another unexpected build in jobs, could double up the positive effect on the markets.

How Much More to Go?

The Fed doesn't care so much about the specific number of jobs created but rather the employability ratio and whether that puts upward pressure on prices. Recently, several FOMC members - most notably the typically dovish Neel Kashkari - have worried that the unemployment rate below the structural level was a problem. Average hourly earnings have not kept pace with inflation but are growing at over twice the target rate. As inflation comes down, it's getting closer to the rate salaries are increasing, meaning the employment problem could be seen as contributing to "sticky" inflation.

The unemployment rate is expected to rise to 3.5% from 3.4%, with the labour force participation rate ticking down to 62.5% from 62.6%. That indicates considerable tightness in the labour market, but a substantial increase in the unemployment rate could open the door for a return of the expectations for a pause.

Cable Correcting After Falling Wedge

GBP/USD has fallen to $1.2309 to form a falling wedge and has since moved higher in a corrective mode. For now, $1.2450 appears as the top of the range, with a break to $1.2470 exposing $1.2547. If $1.2348 succumbs instead, it will open the door to the round support and perhaps $1.2270.

Key Takeaways

If May's jobs report shows an increase of more than 200K jobs, Fed may hike in June instead of pausing. Analysts have consistently underestimated the number of jobs created in recent months, with the consensus at 180k. Over 66% of traders now expect a rate hike at the June meeting, a stark contrast from a week ago when the majority favoured a pause. The Fed's concern is more about the employability ratio and whether upward pressure on prices will result. Additionally, if the unemployment rate increases significantly, it could lead to a return to expectations for a pause.