Wall Street surged on soft US job report and ISM service PMI

·         But the Fed may not cut rates even in Sep’24, just ahead of the US election to avoid any political controversy; Israel tension spiked gold again Monday

On Friday the focus of the market was on the NFP/BLS job report for April, which may influence the Fed for an early or delayed rate cut stance. The latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +175K payroll jobs in April against upwardly revised +315K  sequentially (m/m); +278K yearly (y/y), and sharply lower than the median market expectations of +243K.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for Feb was revised down by -34KK to +236K, and the change for March was revised up by +12K to +315K. With these revisions, NFP employment in the last two months combined was down by -22K than previously reported (against a 2M positive revision of +22K in the last report). With the latest monthly revisions, the US economy added an average of +251K payroll jobs per month in 2023, against +377K in 2022, +604K in 2021, and the pre-COVID (2019) average of +168K.

The 6M rolling average of NFP payroll job addition is now around +242K vs the last report of +244K against the Fed’s preference of around +200K, considering a higher labor force amid higher immigration and a higher working-age population. The 2024 (MTD) average of US NFP payroll job addition was around +246K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +167K payroll jobs in April from +243K sequentially (m/m) and +231K yearly (y/y), lower than the market expectations of +190K, and also lower than the ADP figure +192K (released Wednesday). Now the 2024 (YTM) average of US private payroll job addition is around +197K against the 2023 average of +192K, 2022 average of +352K and 2021 average of +571K.

After the latest revisions, the 2023 YTM average of US private payroll is now around +192K vs. the ADP average of +209K in 2023. The 6M rolling average of NFP private job addition is now around +192K vs. +158K ADP survey. The 2022 average of NFP Private Job addition was +352K vs. ADP average of +322K. Overall, the NFP and ADP private payroll job data is now gradually converging and the 2024 (YTM) average is now around +197K vs 172K.

The Government payroll, i.e., employment in Federal, state, and local governments, was increased by +8K in March against +72K addition sequentially (m/m); +47K yearly (y/y), and higher than the market expectations of +53K. After the latest revision, the 2023 average is now around +59K against the 2022 average of +25K and +33K in 2021. The 6M rolling average of US NFP government job addition is now around +50K. In the election year (2024); the government payroll job addition is quite upbeat and now running around the pre-COVID Jan’20 levels of +60K. In 2023-24, Government payroll addition has been quite upbeat for the last few months including December and consistently beating market expectations, but in April, it fell quite sharply, lowest since Dec’22.

In Apr’24, the US NFP payroll was boosted by job gains in private education & health services (+95K); transportation & warehousing (+21.8K); retail trade (+20.1K); wholesale trade (+10.1K); construction, manufacturing, financial activities and government to some extent, while dragged by information, professional & business services and mining & logging.

Compared to the last 12M, in April, US NFP payroll jobs were dragged mainly by the Government, and Leisure and Hospitality (after the winter holiday travel season ends).

Overall, private education & healthcare services were the biggest employers in the last 12 months, followed by government and leisure & hospitality (travel/tourism & hotels). The U.S. economy is primarily a service sector economy (unlike China) and the service sector is the biggest contributor to the economy, but that too is significantly dependent on millions of immigrants, students, patients, and tourists from countries like China, India, Bangladesh, Pakistan, Sri Lanka, and other major South Asian/American/African countries.

US NFP DETAILS

US BLS establishment survey may be better and more comprehensive than ADP:

As per the ADP survey, the number of private employees was around 131922K in Apr’24 against 135015K as per the BLS survey. The difference (3093K) between the two surveys (BLS-ADP) may be for various statistical issues/reasons including the estimated number of freelancers/gig workers/multiple job holders/uninsured workers, doing primary jobs full-time and secondary jobs part-time. The average difference in several private payroll employees between the BLS and ADP surveys is now around 3100K for the last few years.

In both the BLS establishment survey and the ADP private payroll survey, individuals who hold multiple jobs are usually counted based on their primary employment; i.e. only once. In the BLS establishment survey, individuals are counted based on the establishment where they work as their primary job. If someone holds multiple jobs, only the primary job is counted in the survey. The BLS survey collects data from business establishments and counts the number of employees on their payroll, regardless of whether they have one or multiple jobs.

Similarly, in the ADP private payroll survey, individuals are usually counted based on their primary job. ADP gathers payroll data from firms/companies only that use their payroll processing services/software, and it counts each individual based on their primary employment relationship with the businesses included in the survey. If someone holds multiple jobs and one of those jobs uses ADP for payroll processing, only the primary job with ADP would be counted in the survey; if the multiple job holder works in another company, which does not use ADP payroll software/system, he will be not counted.

Both BLS and ADP surveys focus on primary employment relationships to avoid double-counting individuals who hold multiple jobs. But neither survey captures secondary job information comprehensively, so there may be some scope of undercounting of multiple job holders in both surveys. Additionally, the BLS survey samples a much larger number of establishments, around one-third of all nonfarm payroll jobs, compared to the ADP survey which is based on data from ADP's client companies, using ADP payroll processing software/system. The larger sample size of the BLS survey allows it to provide a more comprehensive and accurate representation of the overall employment situation in the US. Furthermore, the BLS survey uses more rigorous statistical methods and adjustments to account for seasonal variations, business births/deaths, and other factors that can impact population/labor force and employment data. This helps the BLS survey provide a more reliable and consistent measure of nonfarm payroll employment.

The BLS survey is based on a sample of business establishments, while the ADP survey is based on payroll data from businesses that use ADP for payroll processing. Differences in sampling methods, sample sizes, and data collection techniques can lead to variations in the reported figures. The BLS establishment survey and the ADP private payroll survey are conducted at different times of the month, which can also contribute to variations in the reported figures. Economic conditions and employment trends may change between the periods, each survey is conducted, leading to differences in the reported data. In brief, the higher number of private payroll jobs reported in the BLS establishment survey compared to the ADP survey is due to the broader scope of the BLS survey, its larger sample size, and the more robust statistical methods employed by the BLS to measure nonfarm payroll employment beside some anomalies in number of multiple job holders and uninsured/casual workers.

The Household survey includes payroll employees and self-employed persons such as gig workers/freelancers, contractors, and agricultural workers. In the household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll.

As per household survey data (after 2023/annual updated population estimate/control revised factor, the nominal number of the civilian labor force increased by +87K in Apr’24 to 167982K against civilian population 268066K (+182K); participation rate 62.7% against pre-COVID participation rate around 63.3% and 2006 levels 66.4% (pre-GFC days).

The average number of additions in the labor force was around +204K against an average number of additions of employed persons +157K in 2023 (after the Dec’23 annual revision), which made the overall average in line with pre-COVID (2019) +169K. The labor force participation rate edged up to 62.7% in Mar’24 from 62.5% sequentially, near the highest since Nov’23 (62.8%). The labor force participation rate was 63.3% in Feb’20 (pre-COVID). The average labor force participation rate is now around 62.6% in 2023 and also YTD-2024. The labor force participation rate edged up to 62.7% in Apr’24 from 62.7% sequentially, near the highest since Nov’23 (62.8%). The labor force participation rate was 63.3% in Feb’20 (pre-COVID). The average labor force participation rate is now around 62.6% in 2023 and also YTD-2024, still lower than pre-COVID levels.

The average number of additions in the labor force was around +204K against an average number of additions of employed persons +157K in 2023 (after the Dec’23 annual revision); ratio 1.30. For 2024 (YTM), the average number of labor force additions is now +133K against the average number of employed persons addition of +77K; ratio 1.73, while the 6M rolling average is now 43 vs 35; ratio 1.23. The overall average ratio between the addition of the labor force and employed persons is now around 1.4; i.e. almost 70% of new entrants in the labor force are getting a job, at least with decent pay (minimum pay as per US standards, now earning around $5000/M).

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has added +25K employed persons in Apr’24, against the addition of +498K sequentially (m/m) and addition of +138K yearly (y/y). The U.S. had around 161491K employed persons in Apr’24; eased from the recent life time high around 161866 scaled in Nov’23; but may soon surpass the 162K mark in the coming months, considering an average expansion of labor force/work-age population and still elevated job openings.

If we deduct the number of private sector payroll employees as per the establishment survey and that of the household survey, we may have an idea of multiple job holders (employees under non-agri payroll), which was around 8455K (SA) in Apr’24 against 8598K sequentially (m/m) and 6033K yearly (y/y). The 2024-YTD rolling average of increase in multiple job holders is now around +344K against +77K in the number of total employed persons. The increasing number of multiple job holders may be the reason behind a drop in the total number of employed persons and an increase in headline NFP job/employee numbers in the last few months.

Overall, as per BLS seasonally adjusted data, now around 5.2% of employed persons are multiple job holders, increased from around 3.4% in 2021 as people may be taking additional full-time/part-time jobs (WFH) to meet increasing cost of living (still 20% higher inflation than pre-COVID times), fear of sudden layoffs/salary cuts during any financial crisis (like COVID, 2007 GFC), flexibility of WFH, higher productivity for both employees and employers (part-time/freelancers may do the same work more efficiently at lower pay than regular full-time employees), flexibility, time savings, schedule freedom, and sometimes lack of workers for a specifically required skill.

In 2024 (YTM), the average rate of labor force addition is now +148K against +94K employed persons, while the 6M rolling average of labor force addition is now around +43K against employed persons addition of +35K. In 2022, there were 15 workers for one job posting, which increased to around 18 in 2023 and is now around 19 in 2024 (YTM). The ratio of US job openings/unemployed persons is now around 1.37 on average in 2024 (till March) against a 2023 average of 1.54 and 2022 average of 1.87 and a pre-COVID average of 1.25. Thus number of job openings is now gradually decreasing per labor/worker, which may be indicating US labor/job market is gradually rebalancing towards a goldilocks state (wage growth not too hot or not too cold), and the Fed is seeking price stability.

 

As per Household survey data, the nominal number of unemployed persons increased by +62K to 6491K in Apr’24 against 6429K sequentially (m/m) and 5716K yearly (y/y). In Apr’24, the U.S. unemployment rate increased to 3.9% (participation rate 62.7%) from 3.8% sequentially (m/m), 3.4% yearly (y/y), and the highest since Jan’22 of 4.0%.

In November’23, the market was expecting an unemployment rate unchanged at 3.8% in Apr’24 with an unchanged labor force participation rate of 62.7%. The 2024 (YTM) average unemployment rate is now 3.8% against the 2023 average rate of 3.6%; the current 6M rolling average of the unemployment rate is also now 3.8%, still below the Fed’s 4.0% red line zone.

The U.S. Average Hourly Earnings (AHE) was around $34.75 in Apr’24 vs $34.68 sequentially (+0.20%) and $33.44 yearly (+3.92%); i.e. the U.S. AHE grew +3.9% yearly in Apr’24 against +4.1% sequentially, and below the market expectations of +4.0% (y/y). Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.00% on average against its +2.0% price stability (inflation) targets (as per the pre-COVID trend) so that there are some real wage growth, which will not cause wage inflation spiral. The average AHE growth for 2023 was around +4.4% against 2024 (YTD) +4.2%, still higher than the Fed’s target of around +3.0%.

On a sequential (m/m) basis, the AHE grew by +0.2% sequentially against +0.3% in Mar’24, and below market expectations of +0.3%. The average hourly earnings (AHE) for all employees on US private nonfarm payrolls edged up +$0.07 sequentially to $34.75 in Apr’24. The Fed needs an average sequential AHE growth of around +0.2% consistently for its price stability targets, while the 2023 average was around +0.3%, almost the same in 2024 (YTD).

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged down to 34.3 hours in Apr’24 from 34.4 hours sequentially (m/m), 34.4 hours yearly (y/y) and in line with the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) edged down -0.09% to $1191.93 in Apr’24 from $1192.99 sequentially, while increasing +3.92% yearly from $1146.99. This translates to average monthly earnings (AME) of around $4767.70 in Apr’24 against $4771.97 sequentially (-0.09%) and $4587.97 yearly (+3.92%); i.e. the AME edged down -0.09% sequentially (m/m) and +3.9% yearly (y/y) in Apr’24.

The average monthly growth of U.S. AME for 2023 was around +3.9% yearly (y/y) against CPI growths +4.1% (y/y); i.e., there were still no wage-inflation spirals and overall real wage growth was negative/almost nil. But in 2024 (till March), AME is growing by around +3.7% against CPI inflation of +3.3%. Overall U.S. minimum/average NFP real wage growth is now turning positive as inflation is falling, which is positive for the Biden admin ahead of Nov’24 election.

In brief, the Apr’24 NFP/BLS job report may be termed as soft after the blockbuster/upbeat job report in March, but the broader U.S. labor market is still hot enough for the Fed to continue the ‘higher for longer’; i.e. restrictive policy stance at least till H1CY24 before going for any rate cuts in late 2024, most probably from Sep’24.

·         A substantial miss in the headline NFP job addition number in Apr’24 (+175K) came on the back of an upbeat addition sequentially (+315K); the average NFP job addition for the last two months is now around +245K

·         The overall 2023 average is 251K against 377K in 2022; and 246K in 2024 (YTM), while the 6M rolling average is now around +242K against the Fed’s target of around +200K on an average

·         The soft payroll job addition number in Apr’24 came amid a sharp fall in sectors like leisure & hospitality and government jobs due to seasonal factors and warm winter-related advantages in the previous months

·         As per the Household survey, the addition of employed persons in Apr’24 was +25K against +87K addition of labor force; the same for Mar’24 was +498K vs +469K; the 2M running average is now around +262K employed persons vs +278K labor forces

·         As per the Household survey, the overall average addition of employed persons and labor force for 2023 was around +157K vs +204K, while the same for the last six months (6M rolling average) is now +35K vs +43K

·         Soft wage growth in Apr’24, but overall real Average Monthly Earnings growth is turning positive, in line with the Fed’s objective for a soft landing with real wage growth around 1.5-2.0%

·         Overall, although the 6M rolling average of headline unemployment number was around 3.8%, just below the 4.0% red line, if we consider the increasing number of multiple job holders, it was almost equivalent to the decrease in the headline number of employed persons and constitute now around 5.2%

·         Thus overall US BLS job report for 2024 is still hot enough 

·         Although the US labor market is now gradually cooling in various parameters after the rapid increase in immigrant workers in 2023; now the Fed is concerned about whether the supply of labor force will be adequate/enough to meet elevated job posting demands in 2024 too considering growing domestic political compulsion (ahead of Nov’24 election) over legal/illegal immigration (cheaper labor force), now affecting employment opportunity for native Americans

·         Overall the Fed will not take any rate action based on a single month BLS/NFP job and inflation report; the Fed will take into consideration the 6M rolling average of core inflation and employment data before taking any rate action

·         Looking ahead, the Fed may consider H1CY24 along with overall economic data from Aug’23 till Aug’24 before going for any rate cut cycle from Sep’24; the Fed is on hold from Aug’23

·         The May’24 US NFP/BLS job report may come as ‘upbeat’ after ‘terrible’ Apr’24 report

Market reactions after the Apr’24 US job report:

·         US Rate Futures now price in two cuts of 25 bps in 2024 vs one before jobs data

·         US Fed Funds Futures raise chances of a rate cut in September to 78% after jobs data vs 63% just before

·         The April jobs report won't change much for the Fed because there's another one before their next meeting. They're more focused on inflation data, it doesn't show "unexpected" weakness But it will certainly help ease fears about reacceleration/overheating - WSJ's Timiraos (Influential Fed watcher/insider)

·         US ISM Services PMI Actual 49.4 (Forecast 52, Previous 51.4)

On Friday, Fed’s Goolsbee said after the April US job report:

·         When the business cycle turns "it is not subtle" with credit deteriorating, and unemployment rising; we have not seen that yet

·         If the Fed remains restrictive for too long it will have to think about the employment side of the mandate, but current numbers are solid

·         I have to get more comfort on whether the Fed is still on a path to lower inflation

·         I feel monetary policy is restrictive, the real Federal Funds Rate is as high as it has been in decades

·         The more job reports like today, the more comfort I will have

·         What happened in the job market this year has to be re-normed based on estimates of higher immigration; still trying to analyze that

·         The Fed must get comfort that recent inflation is not a sign of reacceleration

·         The more jobs report that look like they did pre-COVID the more confidence there is that the economy is not overheating

·         Need to take a step back, and see what the inflation bump is

·         We hit a bump in inflation at the start of the year

·         175K jobs is a very solid report

On Friday, Fed’s Bowman said:

·         The baseline outlook still that inflation will decline with rates steady

·         The risk is high, that consumer demand, more immigration, and a tight labor market could lead to persistently high core services inflation

·         There is also the risk of loosening financial conditions, fiscal stimulus could juice demand, stalling and even reversing inflation progress

·         An inflow of new immigrants to some areas that lack affordable housing could push up rents

·         Geopolitical developments also an upside risk to inflation

·         The extent of data revisions in the past few years makes assessing the economy even more challenging

·         I will remain cautious in my approach to deciding future changes to my policy stance

·         I expect inflation to remain elevated for some time

·         I remain willing to raise the Federal funds rate at a future meeting should data show progress on inflation has stalled or reversed

·         My baseline outlook continues to be that inflation will decline further with the policy rate held steady

·         I will continue to watch data closely to assess appropriate monetary policy

·         I still see a number of upside inflation risks to my outlook

·         Fed's monetary policy stance appears to be restrictive

·         It is unclear whether further supply-side improvements will continue to lower inflation

Market impact:

Wall Street Futures surged Thursday and also early Friday on an earnings boost led by Apple and Amgen. Further on early Friday U.S. Session, Wall Street Futures, and Gold and USD slid on hopes of September rate cuts after a softer-than-expected US NFP/BLS job report and softer-than-expected ISM service PMI. But eventually slips again as this job report for April may not change the Fed’s narrative; one month of weak job data may not change the Fed’s higher for longer stance as the headline unemployment average is still below 4% vs core CPI around 4%; we may see stalled core CPI inflation and better/upbeat NFP/BLS job report in the coming months ahead of Nov’24 US election.

On Monday, Gold recovered from an early Asian session low around 2291 to almost 2232 on escalated Gaza war geopolitical tension as Israel warned of an imminent all-out war in Rafah after Hamas almost poured cold water on the latest series of ceasefire proposals. Wall Street Futures were also under some stress.

Bottom line: Summary

·         Fed may not cut rates before Nov’24 US election

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024.

·         One month of weak job data may not change the Fed’s narrative about higher for longer stance as the headline unemployment average is still below 4%, while core CPI inflation is still around 4%

Technical trading levels: DJ-30, NQ-100, and Gold

Whatever may be the narrative, technically Dow Future (38900), now has to sustain over 39150 for a further rally to 39200/39300-39500/39750 and 40000/40200-40425/40600-40700-42600 levels in the coming days; otherwise, sustaining below 39100/39000-38900, DJ-30 may again fall to 38700/500-38300/38050-37650/37450*, and further fall to 37300*/37200-37050/36600 and 36300/36300 and even 35700 levels in the coming days.

Similarly, NQ-100 Future (17950) now has to sustain over 18150 for any recovery/rally to 18375-18600/18750-18800/18900*-19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18100-18000, NQ-100 may again fall to around 17800/17700-17600-17500 and 17400/17300-17100/17000* and 16890/16700-16595*-16100/15900 in the coming days.

Also, technically Gold (XAU/USD: 2296) now has to sustain over 2280 for any recovery/rally to 2310/2330*-2350/2355 and 2375/2385-2395 and 2400/2410-2425/2435* to 2455-2475/2500; otherwise sustaining below 2275, Gold may again fall to 2255/2235*, and 2180/2145*, and further to 2120*/2110-2100/2080-2060/2039 and 2020/2010-2015 in the coming days.