The first Friday of each month is known on trading desks as “payroll Friday,” which reflects the importance of the jobs number (really jobs numbers, as there is a lot of information in that 40-page report!) for markets. Stronger-than-expected employment numbers tend to push up interest rates, stocks and the dollar, while weaker-than-expected numbers tend to have the opposite impact. Numerous statistical studies show that the employment situation is the single most important macro factor explaining market returns.
So what are the markets expecting for Friday’s release? Right now the consensus is that 225,000 nonfarm payroll jobs were added in May, compared with 223,000 jobs added in April and a trailing six-month (through April) average gain of 255,000. Markets also expect the unemployment rate remained at 5.4% percent in May, unchanged from April, and close to the Fed’s estimate of the NAIRU (non-accelerating inflation rate of unemployment) of 5.2%.
At PIMCO we track momentum in the labor market with a set of indicators that are based on labor market data other than payrolls (see chart). This momentum index gives us a sense of where the labor market is trending and serves as a leading indicator for payrolls. Right now our index is consistent with the market expectation that 225,000 jobs were added in May. If anything, we would not be surprised if Friday’s payroll data surprised on the upside.
The payroll number may well be important for the financial markets on Friday, but will it – in itself – be important for the Fed?
We don’t think so, and here is why: Even if the jobs number is above 300,000 – at the high end of private forecasts – this one number would not likely be enough to trigger a rate hike at the Fed’s upcoming June 16–17 meeting. The recent Fed minutes and statements from officials have gone out of the way to “take June off the table,” and a very strong payroll report won’t change that. The Fed will want to see further evidence that the Q1 decline in GDP was a weather-related fluke, and it would welcome a strong payroll report, but it won’t hike in two weeks because of it.
Or, what if the number is very weak – say below 140,000, which is at the low end of private forecasts? Would this cause the Fed to signal that September is off the table? Also not likely. Momentum in the labor market is robust, and the Fed will put much more weight on the momentum than on any single number.
So all eyes are on tomorrow’s payroll report … except at the Fed.