"The Market Could Fall Quite A Bit": Why The May Jobs Report Is Critical

Ahead of today's non-farm payroll report, traders are confused: do they want a strong data print, or a weak one. Recall that the reason why spoos have surged nearly 100 points in the past three days, is the Fed's admission that a rate cut is now being contemplated. But that means that stocks are once again - as during QE - rising for the wrong reason: poor economic data. In other words, we are back to the "bad news is good news" regime. So the question boils down to this: will a weak payrolls report boost rate-cut odds, or - as Bloomberg wonders - maybe the cuts are priced in and will the sight of a tanking economy, which would be confirmed by a dismal double-digit or worse jobs report, sow terror. On the other hand, another stellar jobs report may push back recession fears, but will it then just stiffen the Fed's resolve against easing, which in turn would crush a market that has already priced in roughly three rate cuts by the end of 2019. Of course, we could get a "goldilocks" number in the middle to the delight of the market.

And then there are wages: just shy of post-cycle highs, how can the Fed be cutting rates when wages are growing at the fastest pace in over a decade?

In short, one can see why Wall Street is confused... and recent economic data is not helping. As BMO's Ben Jeffery writes, there are anecdotes for both the positive and negative side of the June employment report "with seven positive proxies and five negative ones."

On one hand, in the plus column we have both ISM's employment components rising from last month, and the labor differential has climbed to the highest level since 2000. On the other hand, ADP showed the lowest read and largest miss since 2010 and the rise in Challenger job cuts hints of some downside potential.

Meanwhile, as BMO notes, the US has reached the point in the (late) cycle when the tightness in the labor market is arguably the strongest (or only) support keeping the Fed from easing. This leaves the onus on NFP to either confirm or refute the weakness seen in ADP. The Challenger layoffs highlighted industrial manufacturing and automotive companies as the drivers behind the surge in job cuts; further reinforcing the importance of Friday’s BLS release and evidence of trade war fallout.

By way of context, when looking at the statistically significant predictive power of the below anecdotes it is evident ISM Non-Manufacturing employment, ADP and Challenger Job cuts were the most influential. This, to Jeffery makes this month’s divergences between the key proxies all the more relevant.

Below is a breakdown of the positive and negative factors heading into tomorrow's critical, for the Fed's next decision, report:


  1. ISM Non-Manufacturing employment increased to 58.1 from 53.7 in April.
  2. Labor Differential rose to the highest since December 2000 at 36.3 from 33.2 last month.
  3. Seasonally, the May Unemployment Rate has come in lower than expected 55% of the time, been worse than estimates 32% of prints and matched forecasts 13%.
  4. ISM Manufacturing employment rose to 53.7 from 52.4 last month.
  5. Initial Claims for the NFP survey week were lower than expected at 212k vs. 214k consensus.
  6. Continuing Claims in the NFP survey week matched estimates at 1662k after factoring in revisions from the 1657k initial print.
  7. Philadelphia Fed Number of Employees increased to 18.2 from 14.7 but average workweek fell to 10.9 from 11.2.


  1. ADP dropped to the lowest level and showed the largest miss compared to expectations since 2010 at 27k versus 185k forecast.
  2. Empire State Employment dropped to 4.7 from 11.9, however average workweek ticked up slightly to 4.4 from 4.3.
  3. Challenger Job Cuts rose 85.9% YoY in May versus 10.9% YoY last month.
  4. The seasonality of the headline NFP series in May is exactly split with half of prior releases missing estimates and half beating.

So with that in mind, here is a summary of what Wall Street consensus expects tomorrow at 8:30am, courtesy of RanSquawk:

  • The Street looks for a headline print of 180k, down from April's 263K, and below the six-month trend rate of 207k/month. Wages growth is likely to remain at 3.2% Y/Y.
  • Unemployment rate
  • Average Hourly Earnings of 3.2% Y/Y, unchanged from last month, and up 0.3% from last month.
  • Average work week hours: 34.5, up from 34.4 last month.
  • Labor Force Participation rate: Last 62.8%
  • Labor market gauges have been mixed this month, with the ADP measure of payroll growth in stark contrast to the ISM gauges. Some banks have suggested the mixed signals might hint at a turning point in the economic cycle.

Some more observations on expectations:

The trend rate of payrolls growth has been declining in recent months. Over the last three-months, payrolls have averaged 169k/month; over the last six-months, the average is 207k/month; and over the last 12-months, the trend rate is 218k/month. And following April’s above-consensus 263k gain, several factors point to a cool-down in May. Bank of America Merrill Lynch points to the escalation of trade tariffs hurting business sentiment and hiring activity at the margin, and the job cuts from the cyclical slowdown in the auto sector, which it says should be realized in coming months. On the supportive side, BAML notes that consumer sentiment on the labour market continues to improve, and the bank cites the cyclical high in the differential between jobs ‘hard to get’ and jobs ‘plentiful’ in the Conference Board’s gauge of consumer confidence, which it argues implies workers overall feel that labour market conditions remain still in their favor.


Wage growth is expected to remain near cyclical highs at 3.2% YY amid a ramp up of skill shortages, analysts think. ING argues that the important factor for the Fed is that these skill shortages appear to be translating into upward pressure on wages. It also notes that the April Beige book mentioned that firms are having to entice staff with more non-wage  perks, while the most recent Beige Book said most districts saw modest to moderate growth in jobs and wages, though some regions (San Fran and Richmond) cited difficulties in finding workers, or they highlighted tight labour market conditions. Overall, the latest Beige Book indicated wage pressures were "relatively subdued". ING’s estimate for average hourly earnings growth is in line with consensus, and if confirmed, “suggests markets may still be  underestimating potential core inflationary pressures.

ADP Payrolls:

ADP National Employment Data came in at just 27k, well below the expected 180k and last month’s 271k (revised lower from 275k), the lowest print since September 2010. Pantheon Macroeconomics comments that “payroll growth was bound to slow in May, following April’s unexpected strength, but this is a much bigger slowdown than we expected.” ADP’s model incorporates both macro variables and employment data collected from the firms who use its payroll service, Pantheon notes, so the fact that the May number was substantially lower than Pantheon’s estimate, which is based solely on macro variables, implies that the information ADP collected from its clients was very soft. “ADP’s model is not always reliable, but this is such a big miss that we have to temper our forecast for Friday’s official number” the consultancy says, “we now expect a 100K increase.” Elsewhere, Goldman Sachs noted the starkly different signals offered from the ISM and ADP numbers for Friday’s official payroll report: “Given a potentially large drag from financial variables and economic inputs in the ADP model this month, we place substantially more weight on the ISM measure”, the bank said.

ISM Surveys:

The manufacturing ISM employment sub-component rose 1.3 points to 53.7 in May, remaining above 50 for the 32nd straight month. “Employment continued to expand, and at marginally higher levels compared to April but the index recorded the single biggest gain of the five PMI subindices,” ISM’s Fiore said, “comments received include hiring of recent college graduates, increases in temporary labour to support seasonality, and in some cases, deferring hiring due to economic uncertainty.” ISM points out that an employment index above 50.8, over time, is generally consistent with an increase in the BLS data on manufacturing employment. The non-manufacturing ISM employment sub-index rose 4.4 points to 58.1, remaining above 50 for the 63rd consecutive month. Comments from respondents included: “Filling open positions” and “we added a few more employees to fill outstanding needs.  Meanwhile, the headline indices of business surveys were mixed-to-weaker, particularly those conducted later in the month.

Survey timing.

The return of the trade war clearly weighed on several May data releases, particularly the mid- and late-month manufacturing surveys. However, the May payroll month largely preceded the escalation on the Chinese front (new tariffs implemented on May 10th) and wholly preceded that with Mexico (tariffs announced May 31st). Tomorrow’s employment report (survey week May 12th to 18th) will reflect hiring that took place between mid-April and mid-May. Accordingly, Goldman suggests to expect any employment effects of the May tariffs to show up in the June or July reports instead.

Job availability

The Conference Board labor market differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—rose by 3.1pt to 36.3, a new cycle high. Other job availability readings were mixed, as the Conference Board’s Help Wanted Online index declined (-2.4pt to 101.5 in May), but the JOLTS job openings rebounded sharply (+346k to 7,488k in March).

Census hiring

The hiring of temporary federal workers ahead of the 2020 Census has proceeded very slowly so far, with April employment levels (1k workers) lagging those of 2000 and 2010 by 21k and 125k respectively. This year’s recruiting  process may have been delayed or scaled down by the government shutdown and other considerations, and accordingly we expect only a modest boost of 5-10k in tomorrow’s report.

Challenger Job cuts.

Announced layoffs reported by Challenger, Gray & Christmas increased by 26k in May to 66k and are notably above their May 2018 level (+27k yoy). The announced job cuts were concentrated in the computer (+ 9k), telecommunications (+4k), food (+4k), and retail (+3k) industries.  So far this year, US employers have cut 289k jobs, 39% higher versus the same period in 2018. “The Tech sector announced the highest number of jobs cuts last month,” Challenger said, “large tech firms are finding they need to move workers through the pipeline in order to become more agile” and it adds that it has in fact seen “a number of tech and telecom companies offering buyouts to older workers over the last year.” The tech sector cut nearly 12.5k jobs in May, bringing the YTD total to 18.5k, 342% higher than the 4k announced over the same period last year, the data showed. Industrial manufacturing and automotive companies are also announcing an increasing number of job cuts. Challenger said this is significant, as these industries are likely to be most hurt by the potential trade war with Mexico. Industrial companies have announced 44k job cuts YTD, 671% higher than the 6k job cuts announced through May 2018, while the automotive industry has cut 21.5k jobs, 211% higher than the 6,905 cuts in the same period last year.

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Finally, courtesy of Bloomberg, here are several economist opinions what to expect tomorrow.

Jim Paulsen, chief investment strategist at Leuthold Group:

“If we see a really bad number, the market’s going to go down. If it’s anything close to the ADP number, and if it’s supported by the data -- pickup in unemployment and a really weak payroll number -- I think the market falls quite a bit. And the bond yield, more importantly, probably drops below 2% on the 10-year. That would be spooky. We’re not that far. It probably won’t happen, but I do think there’s a risk.”

“If we get a jump in claims and a bad report on Friday with jobs, I think the stock market will be back below 2,700 and the bond yield could be below 2%. There’s a risk of having a series of bad reports given where the market is right now. That’s why I do think the Fed needs to act -- or, they’ll be reacting on Friday after the fact, which won’t be as good.”

Ed Campbell, managing director and portfolio manager at QMA:

If the report is strong, “then the case is that maybe the economy is not sinking as quickly and maybe the Fed is right to say, ‘Hey, we’ve got policy about right at this point, so bond market, you have probably overreacted and maybe that inverted yield curve needs to become less inverted.’ In that case, it might be good for stocks but bad for bonds. I personally would take comfort from a stronger report than a weaker report.”

“It should attract outsize attention because of the current context. U.S. economic growth looks like it lost momentum in the second quarter. We’ve had a string of disappointing economic data and with the trade tensions escalating and the trade war looking like it could be with us for a while, the odds for a deal seem to have declined pretty significantly over the past month. That’s something that could sour business and consumer confidence going forward. The U.S. labor market so far has been a pillar of strength despite clear signs of manufacturing slowdown.”

Hank Smith, co-chief investment officer at Haverford Trust:

“You need to see multiple months of either a low print or a high print to get conviction on a trend. We’re not going to be too worried about it, but it [ADP] does show that business are cautious right now because of the uncertainty. The surprise part of that ADP was small businesses are actually seeing a contraction. That was a bit of a surprise and worth paying attention to. But again, you need to see several months to gain any type of confidence that a trend is being established.”

Ilya Feygin, senior strategist at WallachBeth Capital LLC:

“If we get a strong jobs report, probably equities will decline slightly because the probability of a rate cut would decline. And a good part of this recent rally was due to more rate cuts priced. It also depends what average hourly earnings are.”