The dollar has had a cracking May with the widely followed DXY so far adding 2.8% this month and pretty much matching the outperformance in February. Debt ceiling worries are now easing which means interest rate differentials are now front and centre as investors look to the Fed to quell worrying sticky inflation rather than a slowdown and recession. Money markets are pricing in a 25bp rate increase in June, with a one in five chance of another 25bp rate move in July too.
Incoming business surveys have been highlighting the resilience of the American economy, and this has in turn seen the rate cuts that were baked in later in the year being mostly priced out. Today’s decent JOLTs job vacancy numbers point to companies still gung-ho to find workers and the dollar has made new cycle highs this afternoon.
Certainly, with the FOMC now being heavily data dependent, emphasis turns to the next round of US employment data on Friday. Fed officials are split on whether further tightening is needed. Some want to raise rates again, others would rather pause, but the majority is still on the fence, preferring to examine the next round of economic data before making any decisions.
Forecasts suggest nonfarm payrolls rose by 190k in May, less than the previous month but still a very solid number so late in the economic cycle. The unemployment rate is set to tick up to 3.5%, while wage growth is projected to accelerate slightly in yearly terms.
Nonfarm payrolls have exceeded estimates 12 times in the last 13 months, so economists seem to consistently underestimate the strength of the labour market. This phenomenon might be repeated this time, as the latest business surveys from S&P Global pointed to the fastest increase in employment growth for ten months. They also highlighted rising salary pressures.
A surprisingly strong employment report would cement expectations for another rate increase this summer, or lead investors to further unwind rate cut bets, keeping the wind in the dollar’s sails. Wage growth will be a key focus as entrenched earnings amid hot data could further nail on at least the June rate hike. The Fed generally doesn’t like to surprise markets when the odds are greater than 70%.
Here are the numbers to know for this month’s NFP:
