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Jobs Report Shifts Balance Of Risks Further Toward 1-Cut 2024 Dot

FED
If you take the Establishment survey at face value, May's Employment Situation report was unambiguously strong and is the opposite of what the FOMC would need to see to bring forward its cutting timetable.
  • The strong performance in private sector payrolls, especially in cyclical sectors that looked like they were fading (construction and various services jobs, and even transportation/warehousing), was particularly impressive. As the first key "hard" data for May, it makes April's softer data look like something of an anomaly.
  • Even if you take the rise in the unemployment rate in the Household survey at face value, it's not unambiguously dovish: yes, household payrolls have looked recessionary for months now. But this has seemed out of step with other labor indicators showing more of a gradual pullback, and falling participation cuts against the Fed's thesis that improving supply-side dynamics can maintain downside pressure on inflation even as activity hums along.
  • Indeed, the much stronger-than-expected average hourly earnings figure (which came alongside steady hours), even if just a bounce from a soft April and/or partly attributable to California minimum wage hikes, suggests no major deceleration in wage pressures going in Q2 despite encouraging disinflationary developments elsewhere (see April JOLTS).
  • The "truth" probably lies somewhere in between the two surveys, but taken all together May is far from the "unexpected" labor market weakness that the FOMC had seen as a potential trigger to start cutting. While we don't think it reset the clock on cuts per se, certainly July - if it even was on the table for a cut - is probably out of the question now, and we would suspect Powell will suggest as much next week.
  • It certainly will be interesting to see how he characterizes the large dichotomy in the household/establishment surveys, though we think he will see the balance of evidence as suggesting that the labor market is still gradually moving into better balance.
  • As for next week's FOMC projections, we would still guess that enough members have a bias toward cutting at some point later this year that the end-2024 Fed Funds median will move to 2 cuts (vs 3 in the prior projections), with the higher unemployment rate in May's report (which could force an upward forecast in the end-year rate from 4.0% prior) helping keep the median from going to just 1 cut.
  • But it's an increasingly close call after this report and there are obvious risks that they pencil in just 1 cut. A 1 cut median would become the most likely scenario in the event of a strong PCE-implied CPI report next Wednesday.
  • MNI's Fed preview will be out later today.
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