US payrolls to be watched for support for Fed pause

OVERNIGHT

Asian equity markets are mixed this morning but changes on the day are mostly small. Positive earnings reports, including strong Apple news, seems to have helped lift sentiment. However, falls in European and US markets yesterday amid reports of issues at two more US regional banks suggest that the environment remains uncertain. In China, the April Caixin services PMI was solid but German factory orders fell by 10.7% in March. Early results for yesterday’s English local elections point to some Labour gains but the full outcome will not be known until later.

THE DAY AHEAD

The US labour market report is always seen as a key bellwether of US economic conditions but, of late, it has acquired even more importance with the Federal Reserve citing potential domestic inflationary pressures as a major reason why it has continued to raise US interest rates. This week the Fed strongly hinted that, after ten consecutive moves, it intends to ‘pause’ its rate hiking from the next policy update in June. However, it left itself some wiggle room and today’s report for April is the first of two labour market updates before the June announcement that will be critical in determining whether the ‘pause’ goes ahead.

So far this year, US employment growth has been strong and the unemployment rate has continued to hover around cycle lows. However, given reports of job layoffs particularly in the financial and tech sectors, conditions are expected to cool. We expect today’s report to show slower but arguably still stronger than sustainable employment growth in April of 170k and an unchanged 3.5% unemployment rate. Moreover, while there have been indications this year that wage growth has been slowing, for April we expect a similar rate to March. Overall, then this is not expected to be a report that will provide overwhelming support for a pause. But it should be more than sufficient given that the Fed probably intends to stand pat unless the counter-evidence is very compelling.

The Bank of Canada, who have already paused interest rate hikes, were criticised for possibly having been premature following last month’s stronger than expected labour market report. So, a similar outturn today for April may ramp up the pressure on them to reconsider their position.

In the UK, the April construction PMI may provide some helpful insights into a very interest-sensitive sector ahead of next week’s Bank of England policy update. The headline index retreated in March from February’s nine-month high but importantly stayed above the 50 expansion/contraction level. The details continued to show falls in housing construction offset by rises in commercial activity and civil engineering.  

MARKETS

US Treasury yields rose modestly yesterday while UK gilt yields fell slightly. In currency markets, sterling is up against both the euro and the dollar. After a European Central Bank monetary update that was largely in line with expectations, the outcome of next week’s BoE interest rate call is now awaited.  Meanwhile, markets continue to weigh up the odds on what will happen next to US interest rates.