News & Analysis

Nonfarm payrolls rose 209k in June, down from May’s downwardly revised rate of 306k and below the year-to-date trend of 278k. Most of the weakness occurred in private sector payrolls, which at 149k grew at their slowest rate since December 2019 outside of the lockdown periods.

Adding to the weaker net employment reading, the past two months of payrolls were downwardly revised by 110k, with April’s revised lower by 77k to 217k and May’s downgraded by 33k to 306k. Combined with the fact that 5 out of the past 6 payrolls reports published this year have been revised lower, today’s lower level of employment growth paints a consistent picture of a cooling labour market. The only area of concern for the Fed now is that the lower level of hiring isn’t necessarily translating into wage growth that is consistent 2% inflation. This is because the headache of diverging household and establishment surveys in May has now realigned. On wage growth, average hourly earnings printed at 0.4% MoM (4.9% annualised), while the 3-month annualised measure remains consistently high at 4.66%, above the year-on-year measure of 4.4%.

However, some comfort should be taken on the fact that lower employment growth and falling job openings data should bring down pay growth over time.

Heading into today’s report, one of the major concerns over a soft reading stemmed from the method in which the data is seasonally adjusted. While in recent summer employment data this has played a pivotal role given the data in which the model is based upon readings from previous years, which showed significant employment strength as seasonal hiring coincided with economic re-openings, the seasonal threshold this year wasn’t as punitive as in June 2021 and 2022. For example, the hurdle needed to be breached for private sector employment to be positive in seasonally adjusted terms was 943k in June 2022 compared to 855k on average in 2017-2019, whereas this year it sat between the two at 870k. As such, the weakness in the private sector payroll growth wasn’t necessarily a byproduct of statistical techniques, but in fact was more representative of weaker employment conditions. This was reinforced by the 452k increase in the number of people employed part-time for economic reasons to 4.2m, which was primarily due to slack work or business conditions (+308k). Further reflecting the weakness in labour demand is the proportion of those unemployed for 5-26 weeks, which is now at a post-GFC high once discounting the pandemic.

What will also give the Fed some comfort is the continued weakness in leisure and hospitality employment at +21k, which is notable seeing as the level of employment in this sector remains 269k below February 2020 levels.

Largest proportion of workers unemployed for 5-26 weeks since the start of the GFC, once discounting the pandemic

With the level of wage growth remaining uncomfortably high and data continuing to show robust demand conditions, the Fed will remain undeterred in hiking rates again on July 26th.

However, signs of normalisation in the job market will likely reduce the central bank’s ability to hike again in Q4 as is suggested by their June dot plot. The market’s response to today’s jobs report is in line with this view. The probability of a further 25bp hike in November fell 10 percentage points to 40%, while the 2-year yield now finds itself back below 5%. In terms of FX, the weaker net employment figure prompted a kneejerk sell-off in the greenback, with losses the most extreme against the rate-sensitive Japanese yen, but this move was retraced slightly in the minutes after.

The response in FX markets to today’s report confirms our view that the broad dollar will likely trade in a range bound nature over a tactical horizon.

Broad dollar slips after softer payrolls report but remains well within recent ranges

Simon Harvey, Head of FX Analysis


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