NFP Critical to Gauging Sep Cut Chances

After a soft jobs report last month, analysts expect a further slowdown in job gains, keeping expectations aligned with the Fed's interest rate cuts.

Signs of Easing

The main economic data that came out in May supported the easing narrative as inflation measures have reversed recent pressures. However, comments from Fed officials have not fully confirmed it, as they want more data to assess whether price gains can continue falling from here.

Earlier this week, the JOLTS report showed an unchanged labour market in April, with job openings exceeding job seekers. The quit rate, an indicator of confidence in finding better jobs, also remained relatively unchanged, implying the labour market is "tight". This could be an issue for the narrative that restrictive Fed policy needs to be eased soon.

Some ultra-hawkish officials, like Neel Kashkari, even suggested that the Fed may not be done with interest rate hikes yet. So traders will look to the jobs numbers for evidence of a slowing inflation to gauge whether a September cut is still in play.

Getting Their Wish?

Although it has lost its predictive reputation, the ADP employment survey released earlier in the week showed weakness in the labour market, with jobs added falling below expectations. Despite the slowing growth, however, the wage growth rate remained steady, suggesting inflationary pressures may persist.

Looking ahead to tomorrow's Nonfarm Payrolls (NFP) report, markets will likely focus on average hourly earnings to see whether strong wage growth supports consumer demand and prices. They are expected to grow at 3.9%, matching the prior month but still above the most recent 3.4% inflation rate, which may add to inflation pressures.

Forecasts point to May adding 151K jobs, lower than the 175K in April. However, the unemployment rate is projected to remain unchanged at 3.9%, a level generally viewed as below full employment. This could lead Fed officials to consider the labour market still tight.

S&P500 Impulsively Higher

The S&P 500 reached new records just yesterday, with the completion of the measured-move flag pattern projection that ended at 4925 pointing to 5625. However, if recent momentum continues impulsively in the 5th wave up, bulls may face selling pressure around the 5500 round level. With the market now at discovery prices, the current upward move could potentially end in the short or medium term. For the time being, the focus may be on the 5200 and 5125 swings for signs of weakness or renewed buying interest.

Source: SpreadEx / SPX 500

Key Takeaways

Based on a soft jobs report last month, analysts expect further slowing in US job gains, keeping expectations aligned with the Fed's rate-cutting stance. Some signals from economic data in May support easing as inflation measures reversed recent pressures. However, comments from Fed officials suggest more data is still needed, with traders focusing on the upcoming jobs numbers to gauge whether the expected rate cut in September occurs. NFP forecasts show that payrolls added 151K jobs in May, lower than in April. Though unemployment is projected to stay at 3.9% and average wages are higher, and may lead the Fed to view the labour market as tight.