HG MARKETS:

In May, U.S. job growth likely maintained a moderate pace, with wage gains expected to remain steady. This situation would keep the Federal Reserve in a wait-and-see stance regarding interest rates, although it might bolster expectations for at least one interest rate cut this year. The Labor Department’s highly anticipated employment report, scheduled for release on Friday, is also projected to show the unemployment rate staying below 4% for the 28th consecutive month. Despite some recent softening, the labor market’s resilience has allowed the Fed to deliberate over the timing of rate cuts. The U.S. central bank is anticipated to keep its benchmark overnight interest rate steady at the current range of 5.25%-5.50% in its upcoming meeting, where it has remained since last July.

Nonfarm payrolls likely increased by 185,000 jobs in May, following a rise of 175,000 in April. This projected increase is lower than the three-month average of 242,000 jobs. The estimates for May’s job growth range from 120,000 to 258,000. The labor market’s resilience persists despite the Fed’s aggressive rate hikes, which have increased the policy rate by 525 basis points since March 2022 to curb overall economic demand. Financial markets are anticipating a potential downside miss on job growth for May, reflected in the 10-year U.S. Treasury yield nearing a two-month low and signs of a hiring slowdown among small businesses.

Other indicators suggest a more gradual loosening of the labor market. The Fed is monitoring labor conditions and economic growth closely to avoid keeping rates excessively high, which could overly cool the economy as it strives to reduce inflation back to its 2% target. Economic output in the first quarter grew at the slowest rate in nearly two years, with current quarter data showing weaker-than-expected results. Economists generally expect the job market to continue softening as the supply and demand for workers stabilize. Earlier data indicated a decline in job openings in April, with the number of available jobs per job-seeker at its lowest level since June 2021.

Average hourly earnings are expected to have increased by 0.3% in May, following a 0.2% rise in April. Wages are projected to have risen by 3.9% year-over-year through May, consistent with April’s increase the lowest in three years. Wage growth in the 3%-3.5% range is considered aligned with the Fed’s inflation target. A majority of forecasters in a Reuter’s poll expect the Fed to cut its policy rate in September, with another cut anticipated later in 2024. However, there remains a significant risk that the central bank may opt for only one cut or none at all.

The unemployment rate is forecasted to remain unchanged at 3.9% in May. The labor market has benefited from increased immigration over the past year, potentially allowing for stronger job gains without causing renewed inflationary wage pressures. What remains uncertain is the extent to which reduced hiring plans by small businesses, dampened consumer demand, and decreased profitability will impact job gains in the upcoming months.