US NFP forecasted at 170K for May - Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that today’s main event is the release of the US Employment Report for May.

Key Quotes

“In the minutes of the April meeting the FOMC gave three conditions for a June rate hike: a GDP growth rebound in Q2, continued improvement in the labor market, and rising inflation. While we are on track to meet the conditions for GDP growth and inflation, the labor market faces its crucial test today.

The Committee prefers nonfarm payroll growth of 200K or more, but thinks that an average of 150K over a period of time is sufficient to absorb the inflow to the labor market. Our own econometric model, which takes into account the other labor market indicators for May that have already been published, generates a forecast of 170K. However, this does not take into account the negative impact of the Verizon strike, which could subtract about 35K from the nonfarm payrolls this month. This would put our adjusted forecast at 135K. Nevertheless, this is just a temporary effect that will most likely be corrected next month. Therefore, the Fed will look through this and focus on the underlying trend in recent months and whether that inspires enough confidence in the momentum of the US economy to hike, despite the global risks emanating from the Chinese economy and the UK referendum that takes place a week after the Fed’s June meeting.

Besides nonfarm payroll growth, the Fed will also judge the Employment Report on what it tells us about the remaining slack in the labor market and possible wage pressures. Note that the Fed’s Beige Book mentioned earlier this week that while employment growth was modest, the labor market was tight. If the Employment Report also shows only modest employment growth, but measures of unemployment and/or wages point at increasing tightness of the labor market, this will still be reason for the Fed to hike.

In contrast, a disturbingly weak report could elevate the global risks that are still on the minds of the Committee. This could delay the first rate hike of this year to July or even September. However, if the report is okay or okayish, we expect the Fed to hike in June, followed by another hike before the end of the year, most likely in December.

Note that Fed Chair Yellen will speak on Monday and may provide us with her interpretation of today’s Employment Report.”