Non-Farm Payroll look-ahead/ ISM Manufacturing/yield curve

This Friday sees the release of US Non-Farm Payrolls for May. We’ll also get an update on the Unemployment Rate and Average Hourly Earnings.

Non-Farms are expected to show gains of 190,000 which would be a modest, but welcome, improvement from April’s disappointing increase of just 164,000 – well below the 190,000 expected then as well.  

The last two months have fallen short of consensus forecasts so another miss in the absence of upside revisions would rattle markets and lead to a pull-back in the US dollar.

The Unemployment Rate is forecast to remain steady at 3.9% - unchanged from April and still at 17 and-a-half-year lows.

Recently, traders have paid particularly close attention to Average Hourly Earnings. The unexpected jump reported at the beginning of February was cited as one of the triggers for the sharp sell-off in equity markets. However, unless earnings come in significantly higher than the +02% month-on-month expected, they could be less of an issue given recent comments from members of the Federal Reserve. The Fed has made it clear that they not only expect inflation (as measured by Core PCE) to rise above their 2% target, but will be quite relaxed about an overshoot. As far as investors are concerned, this suggests that the Fed is unlikely to tighten monetary policy more aggressively than currently forecast should inflation continue to pick up this year.

Later on Friday afternoon we have the US ISM Manufacturing PMI. This is a forward-looking indicator and has fallen sharply since February this year when it came in at 60.8 against 57.3 in April. It is expected to recover to 58.2 but another weak number would lead analysts to downgrade their forecasts to 2nd quarter GDP. If so, expect market to dial down on Fed hawkishness. Bear in mind that that higher inflation with lower growth means stagflation. Bad for bonds and equities.

But all this comes against the backdrop of concerns over Italy, Spain, Turkey and more tariff talk. While the broad-based US-focused Russell 2000 hit fresh record highs this week, the S&P 500 continues to run into resistance around 2,740 compared with an all-time high above 2,870. Support comes in around 2,680. US Treasury bond yields have fallen back sharply over the past fortnight giving some relief to equity traders. However, the yield curve continues to flatten with the 2-10 spread now around 42 basis points from 54 in mid-May. This could be a much bigger concern for investors if this trend continues.

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