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It’s that time again. Tomorrow is the first Friday of a new month which is when we get the latest update on the US’s most important employment numbers. Tomorrow’s release is particularly significant as it comes less than two weeks before the Federal Reserve’s June FOMC meeting.
The US Federal Reserve has a dual mandate to ensure maximum employment and price stability. In this regard the change in tomorrow’s headline payroll number is particularly important, as is the data on Average Earnings. The actual Unemployment Rate is less of an issue as this seldom misses expectations by more than 0.1%. Also, it has been hovering around the 5% area since November last year and “full employment” or the “natural rate of unemployment” is generally thought to be somewhere between 4.7% and 5.8%, so it is well within target.
Earlier today we saw the release of the latest ADP Non-Farm Employment change. This is a private survey designed to mimic the government’s NFP release. Investors view the ADP data as a “heads-up” ahead of the official Non-Farm Payroll report. It certainly is effective in measuring the overall trend in the data, but it can be patchy on a month-by-month basis. This is because the government’s number tends to be considerably more volatile. That is why last month’s unexpected drop in the ADP number was such a surprise, particularly as it foreshadowed a similar downside miss in the NFP.
Today’s ADP Employment Change came in at 173,000 - in line with expectations. On top of this, the previous release was revised up by 10,000. All-in-all, this appears to bode well for tomorrow’s NFP with a consensus estimate of an increase of 160,000 jobs in May – unchanged on April’s number.
But interpreting tomorrow’s release is likely to be complicated by a strike by workers at Verizon which will affect last month’s data. By some estimates this could reduce the headline print by anything between twenty and thirty five thousand.
This should be factored in to tomorrow’s expectations. However, a big downside miss may cause initial algo-driven volatility. But ultimately a bad number may be explained away by the strike. Consequently it is unlikely to persuade investors that the Fed is ready to give up on a summer hike.
This time last month the markets didn’t expect the Fed to raise rates this summer. Yet even back then a number of Fed members were anxious to keep the prospect of a June hike on the cards. Since then we’ve had the minutes of the FOMC’s April meeting together with a host of hawkish comments from Fed members. These commentators included Janet Yellen who last Friday said that gradual and cautious rate increases could be “appropriate” in the coming months. While this keeps the June meeting “live” any decision may well be delayed until July. This is due to concerns over the UK referendum on EU membership which takes place one week after the June meeting.
So, while a good number tomorrow (say, 160,000-plus) keeps a summer rate hike firmly on the agenda, anything around 130,000 may not be bad enough to fully discount monetary tightening. Yet again, uncertainty will continue to dog the markets. Then investors will zero in on the next key event which is a speech from Janet Yellen on Monday. 
David: Tomorrow’s release is particularly significant as it comes less than two weeks before the Federal Reserve’s June FOMC meeting. 

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Posted by David Morrison

Category: PM Bulletin

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