US: May payrolls weakness goes beyond trade frictions – Westpac

According to Richard Franulovich, head of FX strategy at Westpac, rising trade tensions were a widely cited factor behind the startlingly weak US May payrolls, and it’s immediately apparent from the industry breakdown that weakness goes well beyond sectors directly exposed to trade.

Key Quotes

“We count four sectors directly exposed to global trade - durable goods manufacturing, non-durable goods manufacturing, wholesale trade and transportation/warehousing. There will be many more tangentially exposed but these four likely account for the bulk of the direct exposure.”

“Each of these four industries saw weaker jobs growth in May. In aggregate these sectors posted a meagre +10k in jobs growth in May, well down on their six month average of 30k.”

“But other sectors seemingly unrelated to external trade also saw weaker May jobs growth. Health care, construction and state and local govt all slowed markedly in May.”

“There is the possibility that the weakness in these areas is a lagged impact from the volatility in global markets and the hit to confidence that occurred late last year, due in part to elevated trade worries, but its hard to know for sure.”

“The sharp fall in US yields has seen the USD give back a good amount of yield support. The DXY weighted 2yr swap differential for example is at +190bp, a material decline from the +283bp peak reached in early November 2018. But, when viewed from a multi-decade perspective the USD still retains considerable yield appeal.”

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