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US jobs data could set the tone for rate pause in May

Despite finishing yesterday’s session higher US markets still closed the week lower, with the S&P500 losing ground after weekly jobless claims rose more than expected last week, rising by 228k, while the 3 previous weeks were all revised higher from the mid 190k’s to between 230k and 240k.

This was a significant reframing of the picture of the US labour market coming as it has in a week that has seen a softening of US data from the ISM manufacturing and services numbers, to a weaker-than-expected ADP payrolls report.

That’s not to say that the US economy is faltering badly, it isn’t but the narrative has shifted from an economy that appeared to be doing well to one that may be due for a pause in the pace of rate rises, as opposed to another 25bps move.

Job openings are still higher than they were pre-pandemic at just below 10m, but they are still at their lowest level since May 2021, and have started to fall sharply and it is clear that the banking crisis in March has given the US economy a knock.

The February payrolls report saw yet another set of strong numbers seeing a gain of 311k, while January was revised lower to 504k.

The rise in the unemployment rate to 3.6% from 3.4% was treated as a slight negative, but it also coincided with a rise in the participation rate to 62.5%, which was the highest level since March 2020, and thus suggests that more US workers are returning to the workforce. We also saw a larger-than-expected increase in average hourly earnings to an annualised 4.6%, once again indicating some upward pressure in wages.

At the time weekly jobless claims were still averaging below 200k per week, and vacancies have come down a bit, however in with the recent deterioration in the data the jobs market isn’t in too bad a shape, although the announcements of further job losses in recent weeks will start to trickle down in the headline numbers.

As we look to today’s US non-farm payrolls numbers, expectations are for another 235k, with the unemployment rate set to remain steady at 3.6%, and wages set to increase 0.3% month on month.

The bigger question here is what a weak report will do to expectations around future rate rises, which the bond markets are already suggesting could be close to an end point.

As it is this week’s poor data has already got markets pricing in the prospect of rate cuts by Q3, even as core inflation remains around 5%.

For that to become more likely, today’s jobs report would need to be really disappointing, and next week’s CPI numbers would need to see a sharp slowdown in inflationary pressure. We might see one, of these happen but not both.

That remains some way off which means the most likely outcome as we look towards today’s payrolls is a lengthy pause in rates at current levels, and if the wheels do start to come off then we may start to see rate cuts, but that would probably only happen when core prices start to fall below the Fed funds rate.

With US markets, and other markets closed today we will have to wait until next week to get a definitive market reaction, but FX markets could well offer some clues when the numbers do break at 1:30pm today.

EUR/USD – currently range bound slipping back from the 1.0980 level, with the 1.1030 area as the next key resistance. We have an uptrend line from the March lows which comes in at the 1.0830 level, which needs to hold to retest the highs and the 1.1000 area.

GBP/USD – slipped back to the 1.2410 area yesterday which needs to hold for a move toward the 1.2660 area in the short term. Below 1.2400 argues a move back towards 1.2270. 

EUR/GBP – finding support at the 0.8720/30 area this week. Below 0.8720 could see a move toward 0.8680. Still has resistance at the 50-day SMA. On the upside, we have trend line resistance at the 0.8870/80 area.

USD/JPY – found some support at the 130.50/60 area yesterday, as we look to close in on the 130.000 area. Currently has resistance at the 132.00 area.


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