May jobs data blows past expectations

The US non-farm payrolls report for May blew past expectations and has prompted a meaningful shift in market expectations for where US rates go over the rest of 2024. Data from the Bureau of Labor Statistics showed the US economy added 272k jobs in May, above all market expectations while 15k jobs were deducted from the prior two months’ estimates. Average hourly earnings accelerated to 0.4% m/m from 0.2% in the prior month and were up 4.1% y/y. Job gains were spread across multiple sectors with the private sector leading the way. Education and health were the largest contributor to growth in May while business services and trade and transport also rose strongly. Government jobs expanded by 43k last month.

The headline number for the non-farm payrolls appears very strong but other labour market data gave a more uncertain picture. The unemployment rate ticked up to 4% thanks to a drop in the household survey of employment (down 408k) while the participation rate also declined to 62.5% from 62.7% a month earlier. This mixed outcome on labour—simultaneously hot and cold—will be a challenge for the Federal Reserve. On the release of the data market expectations for rate cuts plummeted to less than 1.5 cuts for the rest of 2024 from close to two cuts a day earlier. Inflation data for May will be released later this week and the Fed itself will hold an FOMC meeting where a new summary of economic projections will be released. Markets will likely focus heavily on the dots plot and whether it will be trimmed to two or fewer cuts.

The Reserve Bank of India kept rates unchanged at its early June meeting, keeping its repo rate at 6.5%. Two members of the MPC voted for a cut in rates, however, up from one at the last RBI meeting. At the same time as holding rates unchanged, the RBI revised up their growth forecast for fiscal year 2025 to 7.2% and kept inflation expectations at 4.5%. In the press conference following the MPC decision, RBI governor Shaktikanta Das did not give any indication of adjustments in policy following the results of India’s election released earlier in the week.

Today’s Economic Data and Events

• 11:00 TU industrial production m/m April
• 11:00 TU current account balance April

Fixed Income

• US Treasuries plummeted in response to the release of the May labour market data. Yields on the 2yr UST jumped by 16bps to 4.8868% while the 10yr yield rose by almost 15bps to 4.4335%. In the absence of Fed speakers in their blackout period ahead of the FOMC markets may continue to price rates at a higher level as economic data—particularly inflation and jobs numbers—suggest no easing in rates is required. Options pricing for the Fed Funds rate has less than 1.5 cuts priced in for 2024 as of the end of the week.
• Bond markets generally sold off on Friday in response to the shift higher in USD yields. Bund yield added 7bps to 2.617% while gilt yields added almost 9bps to 4.26%.
• Emerging-market and high-yield bonds closed lower as the US dollar and rates surged. Regional credit was no exception with GCC bonds down 0.4% according to a Bloomberg index.
• S&P affirmed their “A+” rating on Kuwait with a stable outlook.

FX

• The stronger than expected labour market data pushed the US dollar higher against all peer currencies at the end of the week. EURUSD slumped by 0.8% to 1.0801 while GBPUSD fell 0.6% to 1.2719. USDJPY pushed higher by 0.7% to 156.75. Currency direction for the week ahead will be set by the release of the May CPI report for the US as well as adjustments to the Fed’s summary of economic projections.
• Commodity currencies also sold off sharply with USDCAD pushing higher by 0.7% to 1.3764, AUDUSD down by 1.3% to 0.6582 and NZDUSD falling by 1.5% to 0.6106.

Equities

• The prospect of the Fed writing out potential easing in monetary policy later this year weighed on equity markets at the end of the week. The Dow Jones fell 0.2% while the S&P 500 gave up 0.1% and the NASDAQ dropped by 0.2%. Overall the reaction to the jobs data and adjustment in rates pricing was relatively contained in US equity markets.
• European markets closed lower on Friday as well with the Euro Stoxx 50 index down 0.4% and the FTSE 100 off by almost 0.5%. Both the Nikkei and Hang Seng closed lower on Friday ahead of the jobs data.

Commodities

• Oil prices drifted lower on Friday although the moves were relatively modest. Brent futures closed at USD 79.62/b, down 0.3% on the day while WTI was near on flat at USD 75.33/b. However, both benchmarks still recorded declines of roughly 2% for the week as markets absorbed the news that OPEC+ would begin unwinding its production cuts by the end of this year.
• The jump in yields on Friday proved to be a negative across metals markets with gold prices down 3.5% to USD 2,293.78/troy oz while there were parallel losses across the rest of the precious metals complex. Industrial metals were also weaker with LME aluminium down 2.6% at USD 2,578/tonne and copper off by almost 4% at USD 9,762.50/tonne.