Gold slid on upbeat NFP job data and debt deal; Dow jumped

Wall Street Futures surged Thursday on hopes of final passage of the US debt deal in the Senate after the passage of the same in the House late Wednesday and hopes of Fed Pause in June. Late Thursday, as highly expected, the U.S. Senate passed the debt/budget agreement by 63-36 votes (minimum requirement of 60 votes). Democrats voted 46 in favor while 5 voted against (including Sanders), 17 Republicans voted for the bill and 31 voted against. Now Biden will sign the bill into law on Saturday (3rd May). Late Thursday, U.S. President Biden issued an official statement after the passage of the bill in the Senate.

Statement from President Joe Biden on Senate Passage of the Bipartisan Budget Agreement:

“Tonight, Senators from both parties voted to protect the hard-earned economic progress we have made and prevent a first-ever default by the United States. Together, they demonstrated once more that America is a nation that pays its bills and meets its obligations—and always will be. I want to thank Leader Schumer and Leader McConnell for quickly passing the bill.

No one gets everything they want in a negotiation, but make no mistake: this bipartisan agreement is a big win for our economy and the American people.

It protects the core pillars of my Investing in America agenda which is creating good jobs across the country, fueling a resurgence in manufacturing, rebuilding our infrastructure, and advancing clean energy. It safeguards peoples’ health care and retirement security, protecting bedrock programs like Social Security, Medicare, and Medicaid. It protects vital investments in hardworking families that help make our country strong—from child care and education to public safety and Meals on Wheels. It protects my student debt relief plan for hardworking borrowers. And it honors America’s sacred obligation to our veterans by fully funding veterans’ medical care.

Our work is far from finished, but this agreement is a critical step forward and a reminder of what’s possible when we act in the best interests of our country. I look forward to signing this bill into law as soon as possible and addressing the American people directly tomorrow.”

On early European Friday, Dow Future made a session low around 33151 from overnight closing levels of 33200 but soon recovered on Chinese fiscal stimulus for the ailing real estate sector and debt bill agreement. Dow Future further jumped to almost 33862 before closing around 33800 after mixed US job data, which may keep Fed on a pause on 14th June.

On Friday, the focus of the market was also on the NFP job report for May, which may influence Fed for the rate action decision in June. Although Fed already now indicating a pause in June, Fed will also consider labor market health and core inflation trajectory on 13th June before the final decision on 14th June.

On Friday, the latest BLS establishment survey flash data shows that the U.S. economy/employers (public and private sectors); i.e. government and private sector jobs excluding the farming industry (Non-Farm Payrolls-NFP) added +339K payroll jobs in May against +294K sequentially (m/m); +364K yearly (y/y) and above median market expectations of +190K. The YTM average is now around +314K in 2023 against +399K in 2022 and the pre-COVID average of +300K. The 3M rolling average of NFP job addition is now around +253K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +283K payroll jobs in May from +253K sequentially (m/m) and +343K yearly (y/y), higher than the market expectations of +165K, but in line with the ADP figure +278K released Wednesday. The YTM average is now around +248K vs the ADP average of +218K in 2023. The 3M rolling average of NFP private job addition is now around +231K vs +237K ADP survey. The 2022 average of NFP Private job addition was +377K.

The Government payroll; i.e. employment in Federal and state/local governments was increased by +56K in May against +41K addition sequentially (m/m); and +21K yearly (y/y). The YTM average is now around +66K in 2023 against the 2022 average of +23K. The 3M rolling average of NFP government job addition is now around +52K.

In May’23, notable NFP job gains occurred in professional and business services (+64K), namely professional, scientific, and technical services; government (+56K); health care (+52K); leisure and hospitality (+48K); construction (+25K); transportation and warehousing (+24K); and social assistance (+22K). Employment was little changed over the month in other major industries, including mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; retail trade; information; financial activities; and other services. Leisure and hospitality are still trending up, with the sector adding an average of +77K jobs per month over the prior 12 months.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for Mar’23 was revised up by +52K to +217K, and the change for Apr’23 was also revised up by +41K to +294K. With these revisions, NFP employment in the last two months combined was +93K higher than previously reported (against a 2M revision of -149K in the last report).

As per the Household survey, which includes non-farm jobs/employees and self-employed persons (including gig workers, contractors, and farmers), the U.S. economy has deducted -310K employed persons in May’23 against the addition of +139K sequentially (m/m) and +317K addition yearly (y/y). The 2023 YTM average is now around +295K as per the Household survey against +314K in Establishment survey. The YTM average of the addition of employed persons is now around +295K in 2023 against +272K in 2022.

In May’23, the number of employed persons in the U.S. (as per the Household survey) reached 160721K from 161031K sequentially (m/m) and 158299K yearly (y/y). The U.S. economy is now well above pre-COVID employment levels and in line with the Fed’s standard of maximum inclusive and broad-based employment levels.

As per Household survey data, the U.S. unemployment rate surged to 3.7% in May’23, the highest since Oct’22 from +3.4% sequentially (at a 50-years low), 3.6% yearly (y/y) and higher than the market expectations of +3.5%. The number of unemployed persons increased by +440K to 6097K. The so-called U-6 unemployment rate, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, increased to 6.7% in March from 6.6% sequentially and above market expectations of +6.6%. The labor force participation rate was unchanged at 62.6% in May, the highest since March 2020. The labor force participation rate was 63.3% in Feb’20 (pre-COVID).

The nominal number of the civilian labor force increased by +130K in May’23 to 166818K. Overall, the U.S. unemployment rate is hovering around a record low but with decreased labor force participation due to structural labor shortages amid possible deaths due to COVID, early retirements, unfavorable demography, legal immigration issues, lack of proper job-matching skills, and the increasing number of multiple job holders.

The U.S. Average Hourly Earnings (AHE) growth inched down to +4.3% in May’23 from +4.4% sequentially, +5.5% yearly, and in line with market expectations of +4.3% gains (y/y). Fed may be looking for an average annual growth rate of AHE around 3.00-3.5% on average for its +2.0% price stability targets (as per the pre-COVID trend).

On a sequential (m/m) basis, the AHE grew by +0.3% in May’23 from +0.4% sequentially (at the fastest increase in the last 9 months) and lower than the market expectations of +0.4%. The Fed is looking for an average sequential AHE growth rate of around +0.3% consistently for its +2.0% inflation target. The AHE for all employees on private nonfarm payrolls in the U.S. increased by +$0.11 sequentially to $33.44 in May’23, while the AHE of private-sector production and nonsupervisory employees rose by +$0.13 or +0.5% to $28.75.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged down to 34.3 hours in May’23 from 34.4 hours sequentially, below market expectations of 34.4 hours and at a multi-months low.

Average Weekly Earnings (AWE=AWE*AWH) edged up to $1146.99 in May’23 against $1146.55 sequentially (+0.04%) and $1109.30 yearly (+3.40%). This translates to average monthly earnings of around $4587.97 in May’23 vs $4586.21 sequentially (+0.04%) and $4437.10 yearly (+3.40%). The average monthly sequential growth of AWE is now around +0.25% against CPI growth of +0.55%; i.e. there were still now no wage-inflation spirals and real wage growth is negative. The average underlying yearly wage growth is now around +3.40% against CPI growth of +6.09% in 2023; i.e. real wage growth is still negative by around -2.7%. Also around +3.4% underlying wage growth, it’s inching towards the Fed’s target/desire of +3.0% (y/y).

Overall, the May’23 NFP/Establishment and Household survey job report may be termed as mixed rather than blockbuster despite a huge beat in the estimate for the headline NFP job addition with huge positive revision for the last two months:

·         Contraction of employed persons in the household survey

·         Higher unemployment rate

·         The YTD rolling average of NFP job addition (Establishment survey) is now around +314K vs +295K in addition to Employed persons (Household Survey)

·         Both surveys are now converging and cooling from the 2022 average

·         Wage growth is also cooling

Conclusion:

Overall, the May’23 NFP job report may be termed as mixed/goldilocks rather than blockbusters, but hot enough for at least another rate hike of +25 bps in June (normally). But as Fed is already indicating a pause in June and not attempting to fight the present ratio of 70:30 (hold: rate hike) just before the Fed blackout period starts from Friday midnight. Fed never surprised the market with its rate action and as the overall labor market and core inflation is cooling gradually, while the Fed repo rate at +5.25% is now near the mid-zone (+5.50%) of the restrictive zone (5.00-6.00%), Fed may go for a pause on 14th June, but may also project (June SEP) for another one/two hikes in September and December to manage inflation expectations.

The average underlying core inflation is now around +5.1% (CPI+PCE) and at +5.25% repo rate, the real rate is now positive by around +0.25% and just below the middle range of Fed’s restrictive zone (5.00-6.00%). The May core inflation data will be released on 13th June, just a day before Fed’s MPC date. But even if the May core inflation data unexpectedly surge, Fed may not alter its hold decision to shake the market just a day ahead of the MPC date.

Looking ahead, Fed may consider a quarterly average of underlying core inflation and outlook and thus may wait for June core inflation data to take any policy action on 20th September. As Fed is trying to ensure bringing down core inflation towards +2.0% targets without causing an all-out recession (soft/softish landing), Fed may henceforth move only once in a quarter by +25 bps rather than in each meeting (after increasing the rate to restrictive zone-real positive). Thus in its June SEP (dot plots), Fed may forecast another 25/50 bps rate hike for H2CY23 to control market, bond yield and also inflation expectations. Fed/Congress has to also ensure no job recession due to the increasing application of generative AI.

Market wrap:

On Friday, Wall Street Futures surged on the passage of the US debt/budget deal and hopes of a Fed pause on 14th June. But USD/US bond yield also surged and Gold plunged on hotter than expected headline NFP job additions and resolution of the US debt ceiling crisis.

On Friday, Dow Future jumped almost +700 points (+2.1%), while Nasdaq surged +1% (topped Apr’22 high) and SPX-500 added +1.4% (highest since Aug’22). Wall Street was boosted by almost all the sectors led by materials, industrials, energy (higher oil on hopes of OPEC+ cut), consumer discretionary, banks & financials, real estate, consumer staples, healthcare, utilities, techs, and communication services to some extent.

Bottom line:

Dow Future may scale 34380-580 levels soon on the resolution of the US debt limit fiasco and hopes of a Fed pause on 14th June; technical support is now around 33600-500 zones.