Non-farm payrolls preview: can we expect a rebound from recent weakness?

The May US jobs report will be published at 1.30pm (UK time) on 4 June. As usual, it provides a key insight into the progress of the US economy. Coming at a time when the US recovery is becoming well-developed, expectations are high that another solid payroll report will be delivered.

What are the expectations for this month’s NFP report?

From the non-farm payrolls (NFP) report, a total of 645,000 jobs are expected to have been created for the month of May, a significant improvement over the 266,000 in April, itself a significant miss on estimates. Meanwhile, the unemployment rate is expected to improve as well, falling to 5.9% from 6.1%.

While the number of jobs created each month is quite volatile, the direction of travel for the unemployment rate is clear - it has fallen from 13.3% a year ago to 6.1% now, pointing towards a broad recovery from the pandemic, supported by the substantial stimulus measures of the US government.

What about other employment readings?

The monthly ADP employment report is published a day before this month’s NFP figures, delayed by a day due to the Memorial Day holiday in the US. While the two reports do not move in lockstep they do often move in the same direction, overall. This time around, ADP payrolls are expected to show a growth of 645,000, down from last month’s 742,000.

Meanwhile, the April Institute of Supply Management (ISM) manufacturing employment index edged down to 55.1, from 59.6 in March. While employment for the sector is still expanding, it is moving at a slightly slower pace, although this looks to be some brief weakness given the strong growth since December. For the non-manufacturing report, the picture continued to improve, with the figure rising to 58.8.

What about wages?

US wage growth is perhaps less of a concern than it was pre-Covid-19, since the main focus is on people returning to the workforce. However, it is disappointing that average hourly earnings are expected to grow 0.2% for May, down from April’s 0.7%. Still, with wages a key component of inflation, a slower pace of growth in pay packets will help calm concerns that price growth is about to get out of control.

US dollar technical analysis

The year 2021 has been quite the round trip for the US dollar. The basket of currencies that make up the US dollar index has fallen back to its late-February level of 89.71, giving back all the gains made in March and April. In a sense, this weakness can be traced back to a slowdown in the rise in yields that was such a concern earlier in the year. Additionally, the inflation story has weakened and investors are now perhaps less agitated about inflation and the Federal Reserve’s (Fed’s) reaction to any increase in prices.

Modest bounces in the dollar index since mid-April have prompted renewed selling, and with the latest bounce on 27 May hitting a wall of selling, it looks like the sellers are firmly in control. Further declines target the 2021 low at 89.16, and with low stochastic and moving average convergence/divergence (MACD) readings prevailing at present, it looks like more declines are in order.